Correspondent de-risk threatening 25% of Bahamas institutions

The Central Bank’s chief inspector warned yesterday that 25 per cent of its licensees will find it “difficult” to maintain existing correspondent banking relationships, even though the Bahamas has not been exposed to “wholesale vulnerability” yet.

Abhilash Bhachech, the Central Bank’s inspector of banks and trust companies, indicated that around 110 licensees may encounter trouble in maintaining existing links to the international financial system for themselves and their clients.

Mr Bhachech said he was referring, in particular, to ‘standalone’ Bahamian institutions that did not have the security or comfort of backing from a global parent

Giving a presentation on the impact of correspondent bank de-risking on the financial services sector at the Bahamas Institute of Chartered Accountants (BICA) Accountants Week seminar, Mr Bhachech said: “When we look at our own jurisdiction, we have been quite fortunate that we have not seen a complete loss of correspondent banking. We have not seen a wholesale vulnerability of correspondent banking.”

Correspondent banks are those that allow Bahamian financial institutions to provide services in their home countries, using their physical and electronic banking infrastructure.

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.

However, banks in major industrialised countries have embarked on an increasing trend of severing correspondent relationships with foreign banks, and the Caribbean region is among those that have been most heavily impacted.

The move is being driven by the ‘risk/reward’ analysis, with developed country banks perceiving correspondent relationships with their Caribbean counterparts as too ‘high risk’ when measured by the financial rewards. They are particularly concerned that Caribbean banks are susceptible to financial abuses, such as money laundering and anti-terror financing, which could lead to financial sanctions being imposed on themselves by home country regulators.

Mr Bhachech, meanwhile, said that as a tourist and banking centre, the Bahamas relies on international money transfers conducted via correspondent banking for much of its business model.

He added that based on a recent Central Bank survey, the impact of de-risking or, in some cases, a loss of correspondent banking services, was evident.

“Most of them found it very difficult to renew or to renegotiate the correspondent banking relationships,” Mr Bhachech said.

“We have about 450 licensees, and a little over 100 of them are larger licensees. Roughly three-quarters of them are subsidiaries or branches of larger global institutions.

“To that extent, they can leverage off the parent’s arrangement for correspondent banking, but for the remaining 25 per cent they will find it very difficult to maintain their correspondent banking relationships,.”

Mr Bhachech said the informal banking sector has become more prominent as a result of de-risking.

“The idea of de-risking was to move away from certain activities but, on the other hand, de-risking itself has led to a certain reliance on less regulated evidence of money transfers,” he added.


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