CBR Withdrawals: Understanding the Uneven Occurrence Across the Caribbean
Multiple studies have highlighted the Caribbean as one of the geographic regions most severely impacted by the decline in correspondent banking relationships (CBRs). However, when examined at a disaggregated level, the Caribbean experience of de-risking is uneven across territories. Some countries have experienced sudden, widespread withdrawals of CBRs, which may appear concerted. Others have experienced some CBR losses and associated difficulties but over time have managed to find replacement relationships or reinforced existing CBRs, while still others have experienced very little to no loss of CBRs. For countries within a relatively small geographic region, the level of disparity as it relates to the loss of CBRs may appear counter-intuitive. The World Bank (2015) produced a report which may be regarded as one of the first multifaceted attempts at understanding the decline in CBRs globally. The utility of this study was the substantial effort by the World Bank to identify the motivating factors behind the decision to terminate CBRs. The authors identified the drivers of de-risking by surveying a cross section of interest groups, namely, large international banks providing correspondent banking services, local and regional banks with the capacity to act as both a respondent and a correspondent, and banking supervisors of both correspondent and respondent banks. The findings highlighted that while each financial institution and regulatory authority had its own unique mix of factors contributing to its own unique experience, the drivers could generally be grouped into two broad categories: Business-related causes, with the decision to terminate a CBR based solely on economic terms; and regulatory risk-related causes, with the decision to terminate CBRs based on the higher risk of money laundering/terrorist financing (ML/TF) and the potential for material loss. The authors also identified the fundamental linkage between the two categories, highlighting that in theory the inherent level of risk should influence the expected returns profile of the CBR for the correspondent bank. This suggests that the termination of CBRs by large international correspondent banks is a relatively complex decision incorporating multiple factors. Based on various discussion forums and constantly evolving analysis of global CBRs, some factors which may constitute key elements behind the de-risking decision include size of the economy and aggregate cross border flows, country and financial institution risk profile, and structure of the financial system. As the Caribbean region continues along the path of economic development, it is critical that regional economies maintain access to the global payments infrastructure. The purpose of this technical note is two-fold. It aims to better understand the inherent characteristics of the region which may have contributed to the varying degrees of CBR termination to date, and it aims to better understand the perceived shortfalls in the region. These insights are key for the development and implementation of any corrective measures to enhance the region’s appeal to correspondent banks and to ensure that this global phenomenon does not become a hindrance to the region’s growth and development.