Published On: Mon, Apr 24th, 2017

IMF executive board discusses loss of correspondent banking relationships

IMFWASHINGTON - On April 12, 2017, the executive board of the International Monetary Fund (IMF) discussed the staff report: “Recent Trends in Correspondent Banking Relationships – Further Considerations”. In this regard, directors welcomed the recently launched Caribbean initiative to develop regional responses in collaboration with other technical assistance providers including regional development banks.

The staff report follows up a staff discussion note on the withdrawal of correspondent banking relationships (CBR) issued in June 2016. It provides further considerations on recent trends in, and consequences of CBR withdrawal, with emphasis on remittances, assesses and proposes responses to CBR pressures, and seeks the endorsement of the Executive Board on staff engagement with the membership going forward.

The staff report reviews the drivers of CBR withdrawal focusing on profitability and risk management considerations that inform correspondent banks’ decisions on CBRs. It also assesses the feasibility and impact of policy responses and industry initiatives being considered or implemented to address CBR pressures and identifies practical and actionable measures based on extensive consultation with other stakeholders.

Finally, the paper proposes a multipronged approach for the Fund to monitor risks and advise its membership in the context of surveillance, FSAPs and capacity development activities. To achieve these objectives, the Fund will continue its collaboration with the Financial Stability Board, the World Bank, G20, Financial Action Task Force, Committee on Payments and Market Infrastructures, and other stakeholders.

Executive Board Assessment

Executive directors welcomed the opportunity to discuss the recent trends in, and consequences of, the withdrawal of correspondent banking relationships (CBRs). They emphasized the importance of CBRs in facilitating global trade and remittances, and supporting economic growth and development. They welcomed the initiatives that are currently being considered or implemented to address CBR withdrawal. They underlined the importance of strengthened, coordinated, and collective efforts on the part of public and private stakeholders, and highlighted the important role of the Fund through its surveillance and capacity development activities and its efforts to facilitate international dialogue.

Despite some withdrawal in CBRs, directors noted that cross border payments have generally remained stable, and economic activity has been largely unaffected. However, in a limited number of countries, particularly small and fragile states, there has been a concentration of cross border flows through fewer CBRs or alternative arrangements.

Most directors cautioned that this could accentuate financial fragilities in these countries, and has the potential to pose financial stability risks and undermine affected countries’ long run growth, development, and financial inclusion prospects by increasing costs of financial services.

However, further monitoring and analysis, with better data, is needed to more fully understand the potential impact of CBR withdrawal on financial sector stability, economic growth, and development.

Directors noted that the drivers of CBR withdrawal are multiple, inter related, and vary case by case. They recognized that these are ultimately individual business decisions of correspondent banks based on their assessment of the profitability and risks of CBRs, including concerns with respondent banks’ capacity to effectively manage risks. Recent efforts to strengthen the regulatory and enforcement landscape -- notably with respect to more rigorous prudential requirements, economic and trade sanctions, anti money laundering and combating the financing of terrorism (AML/CFT) measures, and tax transparency standards -- have also contributed to the phenomenon.

In this regard, directors welcomed the efforts by standards setters and regulators to provide greater clarity on international standards and regulatory expectations, and encouraged them to continue such efforts, where necessary.

Directors welcomed the various initiatives by public and private stakeholders to tackle CBR pressures, which have focused on preventing CBR withdrawal from reaching a critical level. Directors cautioned that given the multitude of drivers, there is no one size fits all solution, and that responses to CBR withdrawal need to be tailored, prioritized, and sequenced, depending on country specific or regional circumstances, which would take time.

Directors appreciated the staff’s efforts to identify, in consultation with other stakeholders, practical and actionable measures to address CBR pressures. Directors agreed that the first “port of call” for countries concerned with CBR pressures includes measures to enhance respondent banks’ capacity to manage risks, improve communication between correspondent and respondent banks, strengthen and effectively implement regulatory and supervisory frameworks in line with international standards, particularly for AML/CFT, and remove impediments to information sharing.

They noted that other initiatives, including those designed to increase economies of scale, lower compliance costs, address correspondent banks’ risk assessment concerns, or provide alternative arrangements, should also be considered, although these measures tend to have a more limited impact and would still need to comply with AML/CFT standards.

In the extreme event of a complete loss of CBRs by all commercial banks in a country, the public sector could consider as a last resort temporary mechanisms, including public backed vehicles, to provide payment clearing services. However, a number of directors urged caution regarding public sector intervention, in view of uncertainties over its effectiveness or feasibility and the potential for moral hazard.

Directors welcomed the work that staff has been undertaking in analyzing the data, risks, and policy responses related to CBR withdrawal in its surveillance; assessing the implementation of standards; building capacity to help strengthen regulatory and supervisory frameworks; facilitating international dialogue; and collaborating with the Financial Stability Board, the Financial Action Task Force, the World Bank, the G20, and other relevant stakeholders to support efforts to address CBR withdrawal, while avoiding work duplication.

Directors supported a continued active role for the Fund to monitor risks and advise its membership on policies to help tackle the adverse impacts from CBR pressures, and endorsed the multipronged approach to support member countries outlined in the staff paper, including surveillance and data collection, FSAP assessments, and capacity development. They concurred that the Fund’s capacity development assistance should be tailored to specific circumstances and delivered both at national and regional levels to maximize limited available resources and deepen its impact.

Directors noted that a severe loss of CBRs stemming from policymaking challenges across a range of areas could require deeper Fund engagement. In such cases involving balance of payments difficulties, a Fund supported program could be considered to help restore external and domestic imbalances and would be expected to take place within existing lending frameworks.

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