IMF cautions on wider impacts of loss of correspondent banking in Belize and the Caribbean

The International Monetary Fund (IMF) issued its most recent report on Belize on Monday, following its September 2014 mission to the country, led by Jacques Bouhga-Hagbe. Much of the economic data included in the report has been the subject of recent discussions in Parliament in the context of the 2016-2017 budget debate, but the report puts the spotlight on an unresolved issue that has been in the national and regional spotlight for the past year—the loss of correspondent banking relationships (CBRs).

The IMF notes that major global banks have recently either terminated their correspondent banking relationships with many banks in the Caribbean, or have threatened to discontinue them, forcing those banks to seek out new arrangements with other banks.

In the case of Belize, the Government has reported that even after Belize found alternative arrangements, the new bank also gave notice of termination, forcing Belize to seek out other arrangements to keep its banking system functional.

The IMF explains that a correspondent bank is a financial institution that provides services, generally on behalf of a foreign financial institution. It can conduct business transactions, accept deposits, cash checks or money orders and gather documents on behalf of the other financial institution.

All international transactions conducted through the affected banks (which now have to use other local banks that still have CBRs, including local central banks) are disrupted, if not discontinued, said the IMF, pointing to transactions via cash, checks, money orders, wire transfers, credit and debit cards, and letters of credit for remittances, tourism, international trade and foreign direct investment.

“The termination of major correspondent banking relationships with Belizean banks has so far had a limited impact on the financial system and economic activity,” said the IMF. It added, though, that “…the recent termination of corresponding banking relationships with Belizean banks and banks in many other countries could have a significant impact on financial stability and economic activity in the affected countries.”

The first domestic bank in Belize to report having been cut off by Bank of America, a leading US bank, was the Belize Bank, back in April 2015. The IMF said that as of June 2015, ten banks, including two Central Banks, in five Caribbean jurisdictions had been impacted by the loss of CBRs.

“In Belize, the banks that have already lost major CBRs are of systemic proportions, with assets amounting to more than half of the domestic banking system’s total assets or about 50 percent of GDP. In other Caribbean countries, the affected banks so far are either not systemic or have other ongoing CBRs. Nonetheless, the potential loss of vital CBRs has emerged as a major risk for all Caribbean banks,” the IMF said.

The loss of CBRs could have destabilizing effects on financial and economic stability in the Caribbean, but so far, the impacts have been contained, the IMF said.

When CARICOM Heads of Government met in Placencia in February 2016, they decided to ramp up the region’s action on the political front. They announced that they would be seeking to meet with officials in the US over the coming months. At the conclusion of the Placencia meeting, CARICOM chairman, Hon. Dean Barrow, Prime Minister of Belize, said that CARICOM will employ the full gamut of options available to it to confront the banking crisis that is threatening the region. Among the suggestions is for the region to charter its own bank in the US with which to do correspondent banking business. Another suggestion is that there be business mergers of banks in the region to achieve the critical mass needed to make the Caribbean’s banking business more attractive to US banks, since it was also suggested that US banks were cutting off Caribbean banks because the fines that could be imposed if something goes awry would be too hefty compared to the earnings these US banks derive from doing business with the individual Caribbean banks. To date, there has been no further announcement from CARICOM on these proposed initiatives. Still, the problem remains a major concern for our region.

When banks are unable to process transactions for remittances, tourism, international trade and foreign direct investment, it hurts their bottom-line and thus the wider economy.

“Such disruptions affect local banks’ incomes directly as they lose significant revenue-generating businesses, but also indirectly, at least on a temporary basis, as they hit the economy as a whole and therefore banks’ customers,” the IMF report notes.
“In Belize, the new arrangements that have been put in place with the support of the Central Bank of Belize (CBB) and major credit card companies seem to be working, as international financial transactions have not been disrupted as initially feared,” the IMF noted.
Some affected banks have worked out arrangements with other banks to do wire transfers. The Central Bank of Belize (CBB), for instance, is processing these entities’ cash documents and can also process their wire transfers using its own CBRs, though the increasing volume of these new transactions will likely pose a challenge to the CBB, the IMF said.
The IMF notes that although specific reasons have not been given in termination notices sent to affected banks such as those in the Caribbean, “it is believed that this phenomenon is related to the enforcement of global regulatory standards such as on AML/CFT and prudential regulations. As a result, some customers, business lines, markets and jurisdictions are evidently being perceived as too risky and costly in terms of compliance, and are therefore being cut off.”
In meetings with US regulators in Washington last year, the delegation of Belize officials was told that there is no problem with the Belize jurisdiction. Government officials noted that Belize had become compliant with international anti-money laundering standards as well as those addressing the financing of terrorism.
According to the IMF directors, Belize has mostly addressed the deficiencies identified by the Caribbean Financial Action Task Force (CFATF) and has consequently been cleared by CFATF. However, it added that, “Important reforms are still needed to ensure effective implementation of Belize’s AML/CFT regime in line with recent Financial Action Task Force (FATF) standards.”
The IMF furthermore urged the foreign authorities regulating international banks that are terminating correspondent banking relationships to better clarify their expectations of how these international banks should deal with local banks they perceive as “high risk.”