The Tribune

The effects of correspondent bank ‘de-risking’ on the Bahamian financial services industry are “more extensive than first assessed”, the Central Bank has conceded, with 57 per cent of impacted institutions unable to find replacement relationships.

The regulator, unveiling its second survey on ‘de-risking’s’ local impacts, found that 14 of the 54 respondents (some 26 per cent) had lost at least one correspondent banking relationship within the past three years.

While the numbers are not large in gross terms, the Central Bank said its August 2016 survey had produced “better coverage” of the banking, trust, credit union and money transmission industries than the first assessment in 2015.

As a result, it pronounced: “The extent of the impact of de-risking in the Bahamas appears therefore to be more extensive than first assessed.”

However, the Central Bank also cautioned: “While the withdrawal of correspondent banking relationships has gained some traction, it has not yet reached a critical level to threaten the overall stability of the banking sector.”

The first ‘de-risking’ survey found that just six licensees had suffered the termination of one correspondent banking relationship, with that number more than doubling in the August 2016 version.

As a result, the Central Bank calculated that 16 per cent of its licensees have suffered the loss of a correspondent banking relationship - a significant, material number, even though 84 per cent have not.

Of the 14 institutions to lose a relationship in the August 2016 survey, three were commercial banks; another 10, international banks; and the final victim was a money transmission services provider.

Of the 13 Bahamas-based banks, six were standalone institutions and seven subsidiaries of parent banks, indicating that correspondent ‘de-risking’ impacts are not confined just to the former.

And the Central Bank survey revealed that the effects go far beyond just the loss of international banking relationships.

“Licensees affected by the loss of a correspondent banking relationship seem to have found it difficult to find replacements,” the Central Bank survey said.

“In fact, of the licensees that have lost correspondent banking relationships, 57 per cent (or eight banks) have not been able to find replacement correspondent banks or alternative arrangements.

“Where no replacements were found, the business line affected was able to be funnelled through existing relationships or the parent company.”

Bahamian financial institutions are also being subjected to increased compliance demands from foreign correspondents in return for preserving these relationships.

Some 71 per cent of Central Bank survey respondents said additional anti-money laundering (AML) and counter terror financing (CFT) requirements were imposed by their correspondents, which could ultimately further raise compliance costs and bureaucracy for Bahamas-based institutions, thereby undermining their competitiveness.

“Where correspondent banking relationships were maintained, 71 per cent of the surveyed population advised that additional AML/CFT requirements were imposed by their correspondent banker.

These included requirements for Bahamian institutions to furnish the foreign banks with “additional procedures and policies” on their anti-money laundering and terror financing stance, and internal audit.

Correspondent banks are also applying “more scrutiny” to transactions from the Bahamas and interviewing local banks’ compliance directors on areas such as Know Your Customer (KYC) and taking on clients; the identification of beneficial owners; and how they treat and monitor high risk clients.

And it is not just the Bahamian financial services industry that is threatened by the global ‘de-risking’ trend.

For correspondent bank ‘de-risking’ has potentially major ramifications for the wider Bahamian economy, given that this nation’s model is that of an international business and financial services provider, which also imports the majority of what it consumes.

Bahamian banks rely on foreign correspondents, which are often major developed world banks, to clear foreign currency transactions and payments on behalf of their local clients.

While the ‘de-risking’ impact has yet to truly bite, it could - if it becomes more widespread - threaten to cut off Bahamian banks and businesses from the international finance and commerce systems, undermining the economy’s very existence.

“Careful management of these trends is warranted,” the Central Bank acknowledged, “given the important impact on local commercial banks, and stand-alone international banks. The collective initial impact is more extensive than first assessed in 2015.”

The Central Bank indicated that the impact from correspondent ‘de-risking’ may be amplified by the fact most Bahamian financial institutions rely on just a few such relationships.

“Banks within this jurisdiction generally rely on a small number of correspondent banking relationships,” the survey said.

“As such, evidence suggests that further declines in correspondent banking relationships could potentially pose significant threat to the jurisdiction, particularly with respect to the more vulnerable segments of our banking system (our indigenous banks and standalone international banks).

“Of the entire surveyed population, 67 per cent (or 35 licensees) reported to have maintained one to four correspondent banking relationships (CBRs), compared to 11.54 per cent who maintained five to 10 CBRs, and 7.69 per cent who maintained over 10 CBR,” the Central Bank added.

“This finding is indicative that banks within this jurisdiction generally rely on a small number of CBRs.”

The Central Bank’s survey found that “the vast majority of licensees” had not suffered any actual dollar loss as a result of the termination of correspondent banking relationships.

But it added: “However, some licensees have had to increase investments in automated transactions monitoring systems, and at least three remittance firms were impacted.”

Seven institutions who suffered the termination of relationships said explanations were provided by their former correspondent, while three received no understanding.

Those who received answers said the terminations were in line with global trends, as developed world banks sought to reduce the perceived risk in handling correspondent relationships, based on a risk/reward analysis set against the background of an ever-stricter international regulatory environment.

“The rationale behind the loss of correspondent banking relationships appears to be consistent with views expressed by global banks in the international community, such as reduced risk appetite, strategic decisions and relatively small transaction sizes, leading to low profit margins,” the Central Bank said.

“The responses suggest that correspondent banks have restructured their profit driving strategies, and have deemed the revenue earned too little to justify the risk/costs involved.”

Continuing this theme, the Central Bank added: “When asked what the main drivers/causes of declining correspondent banking relationships in the Bahamas were, most licensees indicated that money laundering/terrorist financing concerns, and the overall risk appetite of foreign financial institutions, were what primarily led the charge.

“This was followed by changes to the legal, regulatory and supervisory requirements that have implications for maintaining correspondent bank relationships (CBRs), and the apparent lack of profitability associated with certain foreign CBR services/products.

“Moreover, licensees indicated that the products most severely impacted by declining CBRs related to cash management services (deposit accounts, payable through accounts) and international wire transfers, in addition to draft clearing.”