CARICOM in search of a response to de-risking
By Louis Robinson
A communiqué issued at the recently concluded 37th regular meeting of the conference of heads of CARICOM ("Heads") held in Georgetown, Guyana has described the process of de-risking and the limiting or negative effects of this process on the international operations of indigenous banking institutions in the regional. The communiqué has also indicated the measures that the heads have agreed to pursue to remediate or otherwise mitigate the effects of de-risking on these institutions.
The communiqué has described the de-risking strategy as the withdrawal of international banks' from their relationships with the indigenous banks. Allegedly, this withdrawal was because of the international banks' fear of being exposed to money laundering risk and the heavy regulatory penalties, and costs of implementing corrective action recommended by the regulatory agencies. The negative effect of de-risking was described as the loss of correspondent banking relationship and consequently the inability of the indigenous banks to offer foreign currency payment and clearing services to their individual and institutional customers in the region. These services facilitated CARICOM trade, economic welfare and the transfer of remittances. The Heads have, therefore, categorized correspondent banking as an important global public good and the de-risking strategy or process as discriminatory and counterintuitive to good public policy. In addition, they have agreed that CARICOM would continue its "robust and unrelenting advocacy on the issue and that the Committee of Ministers of Finance on Correspondent Banking should maintain the current high level engagement".
The Heads seem to understand the importance of foreign correspondent banking for regional indigenous banks' operations. However, their reported follow up action to address the negative effects of the de-risking strategy seems to be flawed. Such action is based on a false assumption that foreign correspondent banking services is a "public good" Correspondent banking services are offered by profit seeking financial institutions with the right to determine what customers they would accept, what products and services they would offer, what geographical locations they would operate, and what risks they would consider acceptable. Perhaps, the CARICOM governments may want to establish their own bank in a key currency country and direct this bank, based on the "global public good" principle, to offer foreign correspondent banking services to all its customers wanting such services irrespective of the risk/reward profile of each customer and the amount of business that each customer generates.
It also appears that the Heads have also neglected the urgent need for the region's indigenous banks to reorganize themselves into larger business units by way of mergers, acquisition, integration etc. Their focus on robust and unrelenting advocacy may be necessary but surely, it is not sufficient. Foreign banks want to offer their correspondent banking services to larger and increasingly efficient indigenous banks than now exist in the region and sub-region of CARICOM. The indigenous banks in the Eastern Caribbean sub-region, driven by the professionalism and foresight of the ex Governor Venner of the Eastern Caribbean Central Bank (ECCB), have been researching the bank integration solution and perhaps are at an advanced stage of addressing the issue of optimum size and preparing a road map to achieve such a size.
No doubt, de-risking now offers Heads the opportunity to strengthen their indigenous banks (e.g. strong capital adequacy, strong asset quality, strong management and compliance with US and Caribbean banking/securities laws, strong earnings growth and excellent earnings quality, strong liquidity, and strong risk management including MIS, internal controls, supervision, risk identification, monitoring, reporting, capabilities, etc.).
It may be impossible for the individual indigenous banks, given their current financial condition, to convince US banks that the returns the individual banks provide their foreign correspondent banks would be adequate to compensate these banks to continue offering banking services to them (e.g. trade financing, foreign remittance, foreign payment services, etc..) relative to the risks these foreign banks now face.
A simple solution is for the Heads to agree that there is really no need for an indigenous banking presence in the Caribbean. What is need is to invite foreign banks to re-establish their branches in the region and through these branches the foreign banks would provide the banking products and services the foreign banks determine are needed in the region (i.e. regressing to the old colonial days). The more complex solution is to integrate these small Caribbean indigenous banks into one unit with branches in each member country. This integrated unit would be in a better position to (a) achieve the strong standards already indicated above, and (b) demonstrate its enhanced capability to reflect the risk/reward profile expected by their foreign correspondents. In addition, some bank resources allocation decisions (e.g. credit extension to small and medium businesses; customizing banking products and services, etc.) in the region would remain in the region.
As knowledgeable and competent professionals, l feel sure that the Heads fully understand the de-risking strategy and appropriate solutions for the region and that the newly appointed Governor of the ECCB would assist the prompt and focused implementation of the bank integration solutions.