ABOVE PHOTO: Christine Lagarde, managing director of the International Monetary Fund, at a press conference at the Treasury in London in May. PHOTO: ZUMA PRESS
Nigeria and other emerging markets are increasingly at risk of financial shocks because of the withdrawal of correspondent banking relationships.
Costly regulations and business preferences are causing Western banks to terminate or suspend correspondent banking relationships with smaller foreign jurisdictions.
According to the IMF said dealings with smaller and lower volume jurisdictions have become less attractive because of concerns about money laundering and terrorism, newly imposed sanctions, overall risk appetite among financial institutions and increasing costs of complying with new regulations.
The head of the International Monetary Fund, Christine Lagarde, has warned that the withdrawal of commercial banking relationships had reached “a critical level in some affected countries,” and warned that it could “disrupt financing services and cross border flows, including trade finance and remittances, potentially undermining financial stability, inclusion, growth and development goals.”
In remarks prepared for a speech at the Federal Reserve Bank of New York on Monday, Ms. Lagarde said large global banks are re-evaluating their correspondent banking models with smaller countries in light of post-financial crisis regulations and anti-money-laundering rules, and some have cut ties with countries that are too risky or unprofitable.
“Large banks are withdrawing from smaller countries,” she said, calling on regulators to collect more data and discuss the issue with banks. “Even if the global implications of these disruptions are not visible so far, they can become systemic if left unaddressed.”
The paper cited several recent examples: at least 16 banks have lost some or all access to correspondent banking services in the Caribbean; in the Marshall Islands in the Pacific Ocean, a commercial bank was told it would lose access to services with a major U.S. bank by the end of this year; in Liberia, global banks have cut about half of the existing correspondent ties and one bank reported that it now costs $150 to process a check. In Angola, companies that need access to dollars are migrating their business to the only two Angolan banks with U.S. dollar commercial banking relationships, the IMF said.
Terminations and loss of access to correspondent banking relationships have also been noted by central banks. In Belize, only two of the nine domestic and international banks have managed to maintain such services and the Central Bank of Belize has lost two of its correspondent banking relationships, the IMF report said. A major Western bank severed its euro correspondent banking ties with the central bank of Liberia two years ago.
According to Wall street Journal, correspondent banking relationships allow money to move domestically or across borders between senders and recipients using different banks, account types and multiple currencies. By exchanging messages, sometimes between multiple affiliates, instructions can be sent to debit money from the a customer in Nigeria, whose bank account is in New York, to credit a beneficiary in Brazil whose bank account is in São Paulo, for example.
Société Générale SA, according to the speech from Ms. Lagarde, manages 1,700 correspondent accounts and processes 3.3 million correspondent transactions daily.
But postcrisis, some of these relationships have seen temporary or wholesale disruptions, IMF and World Bank data show. U.S. dollar wire transfer changes have affected small and medium-size exporters in emerging markets. Socio-economic conditions in countries like Somalia, Samoa, Mexico and the Philippines, where many households rely on remittances, also are vulnerable.
In a question-and-audience session following her speech Monday, Ms. Lagarde said new financial technologies such as blockchain could assist global banks in making cross-border money flows more efficient.
She said her team at the IMF was looking at “how that new technology can be used to circumvent complying with international standards” and how it “could help in alleviating the cost benefit analysis of certain institutions.”