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De-Risk 'Client Migration' To Benefit Larger Banks

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James Smith

Correspondent bank 'de-risking' could drive another wave of Bahamian financial services consolidation by sparking "client migration" to larger institutions, a former finance minister has warned.

James Smith, also a former Central Bank governor, told Tribune Business that the increasing tendency of developed country banks to terminate correspondent relationships with their Caribbean counterparts was "a very great concern" for standalone Bahamian institutions.

He suggested that these would struggle most to both maintain, and replace, correspondent banking relationships, which are vital for their clients to have access to the global financial system and capital markets.

Mr Smith added that banks unable to provide correspondent services would likely witness a "client migration" to those who could, effectively driving business to larger, better-capitalised institutions.

Those best-placed to exploit such trends, in a domestic context, would be the Canadian-owned banks, Royal Bank, Scotiabank and CIBC FirstCaribbean, all of whom would be assured of continued correspondent services via their parent's worldwide network of branches and subsidiaries.

"That's a very great concern but, more particularly, to any offshore banks that are kind of standalone banks that don't have a parent in the developed world," Mr Smith said of the 'de-risking' initiatives by major global institutions.

"The large banks that have branches and subsidiaries in the Bahamas, it won't affect them, but there are small and medium-sized banks that do rely on correspondent relationships and don't have a parent.

"That, for them, could be a severe blow [if they lose a correspondent relationship], as they then have to find another bank to do the same activity."

Mr Smith, now chairman of CFAL, pointed to the Central Bank of the Bahamas' mid-2015 survey, which found that Bahamian financial institutions were being subjected to greater scrutiny by their correspondent counterparts.

Abhilash Bhachech, the Central Bank’s inspector of banks and trust companies, said then that while the impact was not systemic, some correspondent relationships with Bahamas-based banks had been "reduced".

The findings also backed Mr Smith's views, as those institutions impacted the most were local commercial banks and standalone international banks.

"While four banks reported having a correspondent banking relationships terminated, all were able to find replacements," Mr Bhachech said.

"However, the level of difficulty or ease with which they were able to replace their correspondent bank was due in part to the nature of their operations, as well as the foreign correspondent bank’s onboarding requirements.”

He added: “In the event of a withdrawal of a correspondent bank, 15 banks (or 30 per cent) indicated that they had a contingency plan in place for its replacement.

“Thirty-five banks indicated they had no contingency plan in place.”

Echoing the survey results, Mr Smith told Tribune Business: "I'm just guessing that the banks which have a relationship with a parent in money centres like London, New York and Europe will not be affected to the same degree.

"It will be the banks lacking a deep-pocketed, money centre parent who will be affected by this, as well as having to find another correspondent bank to do the same thing for them."

Correspondent banks are those foreign entities that allow Bahamian financial institutions to provide services in their own countries, using their physical and electronic banking infrastructures.

They give Bahamian banks, and their clients, access to the international capital markets and financial system, enabling transactions to clear and be settled on a timely basis, and foreign currency deposits to be taken.

Foreign correspondent banks thus provide the key gateway to the world economy and financial system, lubricating the conduct of international commerce by Bahamian companies - an access that is now being threatened region-wide.

Such access is vital to an economy that imports virtually all it consumes, and Mr Smith said any "cut off" of correspondent services for one Bahamas-based institution will likely drive its client base to competitors.

"If you cut that off, you can't service clients, and clients have to go some place else where they can be serviced," the former finance minister added.

"It would be a migration to the money-centred banks in the Bahamas. There's no cut-off for those banks. That [correspondent banking] will continue to be done by RBC, CIBC or Scotiabank, or a Citibank or J P Morgan Trust."

The three Canadian-owned commercial banks, RBC, CIBC and Scotiabank, account for between 75-80 per cent of banking assets in the Bahamas, according to a recent International Monetary Fund (IMF) report.

While they will still enjoy correspondent relationships through their worldwide affiliates, all the evidence suggests that the greater pressure will fall on the three BISX-listed, Bahamian-owned institutions - Commonwealth Bank, Bank of the Bahamas, and Fidelity Bank (Bahamas).

The former two, however, both stated earlier this year that their correspondent relationships are continuing as normal. And Fidelity Bank (Bahamas) has given no indication yet that it has fallen victim to the 'de-risking' trend.

As for the international or 'offshore' sector, most of the Central Bank's 250 bank and trust company licensees are subsidiaries or branches of global parents. Only a few, such as The Private Trust Corporation and Ansbacher (Bahamas), are independent, Bahamian-owned institutions that are potentially more vulnerable.

Mr Smith suggested that correspondent 'de-risking' was "the second wave" of financial services consolidation set to hit the Bahamas, following the fall-out from the 2000 'blacklisting' and subsequent reforms.

"We've seen this before, with the beginning of the OECD tax initiatives back in 2000 and everything coming from that," he told Tribune Business.

"We saw a reduction in the amount of financial institutions doing business here and throughout the Caribbean, and as well we noticed a migration of that business back to London, New York and places like Delaware.

"One wonders if this [correspondent bank de-risking] is not part of a further similar move by the OECD."

A recent IMF analysis backed up both Mr Smith and the Central Bank, finding that while Bahamian institutions have come under greater scrutiny from their correspondents, there has been "temporary disruption" in only a few instances.

"Financial institutions in the Bahamas have experienced additional scrutiny of their correspondent banking relationships, although only in a few cases has this resulted in temporary disruptions of correspondent banking services," the IMF said.

"Five financial institutions (representing about 19 per cent of the assets of the banking system) have recently lost one or more correspondent banking relationships."

The IMF added that the money transfer and remittances business has been impacted as well, along with business lines including credit card payments, cash management, investment services, and clearing and settlement.

"Although the impact has been limited so far, further pressure on correspondent banking relationships could have an adverse effect on the financial sector and increase costs of outgoing remittances in the Caribbean," the Fund said.

"Indeed, the Bahamas is a source of remittances to other countries. In Haiti, for example, the impact of this spillover would be immediate, as about 75 per cent of remittances from the Bahamas to Haiti are paid and received in the same day."

Fidelity Bank & Trust International last year terminated its near 20-year Western Union franchise, saying it was part of a plan to “de-risk” its business.

Anwer Sunderji, Fidelity’s chairman and chief executive, told Tribune Business then that the bank decided to exit the money transmission services market because it was generating too little reward for the risk involved.

With money transmission deemed ‘high risk’ for anti-money laundering purposes, Mr Sunderji said it potentially jeopardised Fidelity’s correspondent relationships with foreign banks.

He explained that compliance costs were ever-increasing for a low margin, high volume business where the regulatory risk simply did not justify the expense.

Mr Smith said money transmission 'de-risking' would impact those who could least afford it the most, such as migrant workers and low income persons.

He added that it could force such persons to open accounts with established banks and pay increased fees for wire transfers, with some even possibly unable to qualify for bank accounts in the current environment.

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