Correspondent Banking Relationships - World...

INTERNATIONAL MONETARY FUND 1

Correspondent Banking RelationshipsOCTOBER 23, 2018

Ananthakrishnan Prasad

Monetary and Capital Markets Department


2

Outline

1

2

Overall Trends

Fund’s Multipronged Approach

3 Key Messages

4 The Way Forward


3

What Have Been the Overall Trends?

❖ CBRs under pressure in several countries

❖ Limited direct impact because of alternative arrangements put in place

❖ High concentration in cross-border flows accentuating financial fragilities

❖ Could undermine long-term growth and financial inclusion prospects


4

Highlights of the Fund’s Work

September 2017

Working Paper on CBRs in the Caribbean

April 2017

Board Paper on Recent Trends in

CBRsJune 2016

Staff Discussion Note on Withdrawal of

CBRs

October 2017

Working Paper on CBR

Monitoring Framework

February 2017

1st Caribbean Roundtable

November 2017

2nd Caribbean

Roundtable

February 2018

1st Pacific Roundtable

September 2017

2nd AMF-IMF

Workshop

October 2015

1st AMF-IMF Workshop

Regio

nal W

ork

Polic

y W

ork

April 2017

Working

Paper on

CBRs in the

Small States

of the Pacific

October 2015

FSB/IMF/WB 1st Roundtable

October 2016

FSB/IMF/WB

2nd Roundtable

IMF Conference

on CBRs

October 2017

SSA High Level Seminar

April 2018

CCA Roundtable

May 2018

SSA

Roundtable

October 2018

3rd Caribbean

Roundtable

March 2018

Update to the Board on CBRs


5

Multipronged Approach

I. Monitor Trends

II. Monitor Risks & Drivers

III. Facilitate Dialogue

IV. Tailor Capacity

Development

V. Engage in cases

involving tail-risk scenarios

Not yet materialized

Fund’s Multipronged

Approach


6


Approach Multipronged Approach

I. Monitor Trends



IV. Tailor Capacity

Development

V. Engage in cases



7

I. Monitoring Trends

The decline in CBRs, while stabilizing in some regions,

remains a concern

Recent Trends in CBR Withdrawal

-25%

-20%

-15%

-10%

-5%

0%

5%

Africa Americas(excl. NorthAmerica)

NorthAmerica

Asia Oceania Europe (excl.EasternEurope)

EasternEurope

Number of active counterparty countries by region(average percent change across region)

Jan. 2011 - Jun. 2017 Dec. 2016 - Jun. 2017

Source: FSB, SWIFT Watch, National Bank of Belgium.


8


… along with the concentration of active

correspondents.

Recent Trends in CBR Withdrawal

0.765

0.766

0.767

0.768

0.769

0.770

Jan

-12

Ma

r-1

2

Ma

y-1

2

Jul-

12

Se

p-1

2

No

v-1

2

Jan

-13

Ma

r-1

3

Ma

y-1

3

Jul-

13

Se

p-1

3

No

v-1

3

Jan

-14

Ma

r-1

4

Ma

y-1

4

Jul-

14

Se

p-1

4

No

v-1

4

Jan

-15

Ma

r-1

5

Ma

y-1

5

Jul-

15

Se

p-1

5

No

v-1

5

Jan

-16

Ma

r-1

6

Ma

y-1

6

Jul-

16

Se

p-1

6

No

v-1

6

Jan

-17

Ma

r-1

7

Ma

y-1

7

Concentration of active correspondents(GINI coefficient per corridor, 3mo. moving avg.)

Source: FSB, SWIFT Watch, National Bank of Belgium.


9Source: Staff calculations based on FSB (2017), World Bank Remittances Prices Worldwide, World Bank Migration and Remittances Database.

The macroeconomic impact appears contained, but challenges remain


Changes in the number of AC vs cost of remittances

(in percent, 2012-2016)

-100

-80

-60

-40

-20

0

20

40

60

80

100

-30 -20 -10 0 10 20 30

Change in c

ost of

rem

itta

nces

Change in number of active correspondents

While remittance costs seem negatively associated with

number of active correspondents…

… they have remained stable on a global level, but

remain a challenge in some regions.

0

2

4

6

8

10

12

Pacific (SmallStates)

East Asia &Pacific (excl.Small States)

Europe &Central Asia

Latin America &Caribbean

Middle East &North Africa

South Asia Sub-SaharanAfrica

Cost of remittances by destination region(in percent of amount sent)

2011 2012 2013 2014 2015 2016 2017


10Source: FSB.

Remittances: Extent of the Problem

❖ Most jurisdictions say remittance firms are one of the sectors most affected by loss of correspondent banking

services.

❖ In developing countries, remittance flows are frequently a key source of funds for households and represent a

significant percentage of GDP

❖ Remittance flows to low- and middle-income countries are expected to increase by 4.8% in 2017 and 3.5% in 2018

to US$466 bn

❖ Sub-Saharan Africa, Europe and Central Asia, and Latin America and the Caribbean are likely to see the

strongest growth in remittance inflows

❖ Although remittance costs have declined over the past decade, the global average cost of sending US$200

remained at 7.2% in the third quarter of 2017 and is well above the United Nations’ Sustainable Development

Goal target of 3%.

❖ Loss of correspondent banking relationships poses a challenge to the provision and cost of remittance services

❖ Concentration leads to financial stability and financial inclusion concerns

❖ May drive flows underground, increasing AML/CFT risks


11



I. Monitor Trends



IV. Tailor Capacity

Development

V. Engage in cases



12

II. Monitoring Risks & Drivers

CBR Pressures

Profitability

Capital

New

Cap

ita

l R

equ

ire

me

nts

Income

New

Liq

uid

ity

Requ

ire

me

nts

Po

st-

GF

C M

acro

-e

co

no

mic

Con

ditio

ns

CostIn

cre

asin

g C

om

plia

nce

R

equ

ire

me

nts

Risk Assessment

Risk Tolerance

La

ck o

f C

larity

an

d

Con

sis

ten

cy o

f R

egu

lato

ry E

xp

ecta

tio

ns

Hig

h P

rofile

En

forc

em

en

t A

ctio

ns

NP

As/D

PA

s/ C

on

se

nt

Ord

ers

Specific CBR Risk

Resp

on

de

nt B

an

k's

C

usto

me

r B

ase

an

d

Bu

sin

ess M

od

el

Co

mp

lian

ce

Fra

me

wo

rk

of R

esp

on

de

nt B

an

k,

inclu

din

g f

or A

ML

/CF

T

Ju

risd

iction

's R

isk

En

viro

nm

en

t, in

clu

din

g

ML

/TF

Ris

k

Ob

sta

cle

s to

Ris

k

Ma

na

ge

me

nt

Drivers of CBR pressures remain the same

Business relationship based on trust


13


Drivers which have recently gained more attention

❖ Corruption

❖ Transparency - Beneficial Ownership

❖ New International & Bilateral

Sanctions


14Source: FSB.

Remittances: Causes of the Problem

Reasons cited by banks for terminating services to remittance firms

❖ Profitability

❖ Perceived high risk of some remittance firms’ practices because of …

❖ Business models: large volumes of cash transactions; sending money to jurisdictions that are considered

high risk; principal-agent model

❖ Diversity of firms in size, sophistication, target markets, etc.

❖ Lack of confidence in the supervision of remittance firms

❖ Lack of compliance with international standards (FATF) in some jurisdictions


15


The discussion of CBR issues in AIV reached a

peak in 2016

CBRs issues were discussed across all regions

Proportion of published Article IV Staff Reports which include references to CBR

AIV Staff Report Published with mention to CBR

AIV Staff Reports Published

2015 201

6

201

7

3%8%

31%

22%

2014

43%

19%

16%

12%

10%

Number of staff reports with reference to CBRs per Region (2014-2017)

WHD APD MCD AFR EUR


16

❖ Staff continues to discuss CBR issues in Article IV

❖ Belize – holistic approach of issues – trends, risks and macrofinancial linkages

❖ Marshall islands – significant risks to issuance of sovereign digital currency

❖ Countries are using the IMF-developed monitoring framework to identify trends

❖ Cabo Verde, Seychelles, Jamaica, Belize



17



I. Monitor Trends



IV. Tailor Capacity

Development

V. Engage in cases



18

III. Efforts to Facilitate Dialogue

Global partners…

G20 & G24

& FSRBs

…Regional partners… …Private sector…

Global Banks Domestic Banks

Money Service Businesses

…National authorities…

Across regions


19

Monitoring based on SWIFT data

FSB survey of 345 banks

World Bank case studies

IMF monitoring framework

Data collection and

analysis

New FATF guidance

Revised BCBS guidance

Next – follow-up on national

application

Clarifying regulatory

expectations

Inventory of technical assistance

Workshop for TA providers

Capacity building by private sector

Capacity building

Know-Your-Customer (KYC) utilities –

clarified expectations and workshops

Use of the Legal Entity Identifier (LEI)

Information sharing initiatives – new FATF

guidance

Correct use of payment messages –

supervisory guidance and SWIFT guidelines

Technical solutions to

improve the efficiency of due

diligence

Source: FSB.

The FSB Action Plan


20

❖ Promote dialogue and communication between the banking and remittance

sectors

❖ International standards and oversight of the remittance sector

❖ Use innovation in the remittance sector

❖ Remittance-related technical assistance

FSB Stocktake of Remittance Service Providers’ Access to Banking Services


21


Fund’s Regional Initiatives

Caribbean Roundtables

Barbados, February 2017

Jamaica, November 2017

Bahamas, October 2018

Joint AMF-IMF

High-Level Workshops

UAE, October 2015

UAE, September 2017

Pacific Roundtables

Australia, February 2018

New Zealand, February 2018

Africa High Level Seminar

Washington D.C., October 2017

South Africa, May 2018


22


Major/Good Progress in Implementing

Enhancing communication between banks, removing impediments to information sharing

Consolidating transaction traffic “down-streaming”

Strengthening capacity of respondent banks

Improving regulatory and supervisory frameworks, including for AML/CFT

Limited Progress in Implementation, so far

KYC utilities, LEI, digital identity

Fintech

Regional payment and clearance systems

Setting up of public banks

Outcome of regional initiatives highlighted the following measures to address CBR pressures

Measures identified by private sector


23

SSA Seminar highlighted the following measures to address CBR pressures

Timeline Ongoing Short / medium term Long term

Enhancing outreach and communication between banks √

Technical assistance and training by global correspondent banks √

Removing information sharing barriers √

Consolidating transactional traffic √

Fintech √

New technologies (mobile payment platforms) √

Consolidating AML/CFT supervision and regulation √

Key Solutions


❖ Mobile payment platforms have been successful (MPESA).

❖ Cross-border payments between some countries in the region could ultimately be possible via-crypto currency links.

❖ Fintech / digital solutions have potential though most have yet to be developed and broadly implemented.

❖ Need for a level playing field and standardization of regulatory frameworks.


24



I. Enhance Data

Gathering



IV. Tailor Capacity

Development

V. Engage in cases



25

IV. Tailoring Capacity Development

❖ Continued capacity development to strengthen AML/CFT

regimes and banking supervision (Seychelles)

❖ Tailored technical assistance to help address CBR

pressures (e.g., Angola, Belize, Guatemala, Jamaica,

Solomon Islands) and monitor trends (e.g., data monitoring

tool – Bahamas, Belize, Guyana, Cayman Islands )

❖ Develop regional responses in collaboration with regional

CD providers.

❖ Fund is collaborating with the FSB, including on CD

coordination


26

Key Messages

❖ The current trends in CBRs suggest that the decline in CBRs continues, though it seems to have stabilized in

some of the countries that were badly affected (Belize).

❖ While financial fragilities remain in a limited number of countries, overall concentration is still high.

❖ Potential negative impact on financial inclusion and remittances requires continued attention.

❖ Drivers of CBR pressures remain the same (e.g. lack of clarity over regulatory expectations; weaknesses in

regulatory and supervisory frameworks, including for AML/CFT).

❖ In addition, some financial integrity issues (e.g. corruption, transparency, sanctions) have recently gained

more attention.


27

Key Messages

❖ IMF staff have continued to:

❖ Monitor risks through AIV surveillance and FSAP.

❖ Provide CD, including to specifically address drivers of CBR pressure and help authorities

collect data and monitor CBR trends.

❖ Help identify solutions, some of which have been successfully implemented.

❖ e.g. enhanced communication between banks, strengthening respondent’s bank capacities, help

supervisors monitor trends, consolidation of transactional traffic.


28

The Way Forward

❖ Continue implementing multipronged approach :

❖ Monitor risks

❖ Assess macro-criticality of this issue

❖ Provide targeted technical assistance & training

❖ Use Fund’s convening power

❖ Collaborate with other stakeholders on these issues

❖ Upcoming events:

❖ 3rd Caribbean roundtable (October 2018)

❖ 2nd Pacific roundtable (Feb. / March 2019)

Thank You

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