Correspondent Banking Relationships OCTOBER 23, 2018 Ananthakrishnan Prasad Monetary and Capital Markets Department INTERNATIONAL MONETARY FUND 1
Outline 1 2 Overall Trends Fund s Multipronged Approach 3 Key Messages 4 The Way Forward INTERNATIONAL MONETARY FUND 2 2
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 INTERNATIONAL MONETARY FUND 3 3
Highlights of the Fund s Work Regional Work Policy Work June 2016 Staff Discussion Note on Withdrawal of CBRs October 2015 FSB/IMF/WB 1 st Roundtable October 2015 1 st AMF-IMF Workshop April 2017 Board Paper on Recent Trends in CBRs October 2016 FSB/IMF/WB 2 nd Roundtable IMF Conference on CBRs September 2017 2 nd AMF-IMF Workshop February 2017 1 st Caribbean Roundtable September 2017 Working Paper on CBRs in the Caribbean April 2017 Working Paper on CBRs in the Small States of the Pacific October 2017 Working Paper on CBR Monitoring Framework November 2017 2 nd Caribbean Roundtable October 2017 SSA High Level Seminar March 2018 Update to the Board on CBRs April 2018 CCA Roundtable February 2018 1 st Pacific Roundtable May 2018 SSA Roundtable October 2018 3 rd Caribbean Roundtable INTERNATIONAL MONETARY FUND 4 4
I. Monitor Trends Fund s Multipronged Approach V. Engage in cases involving tailrisk scenarios Not yet materialized Multipronged Approach II. Monitor Risks & Drivers IV. Tailor Capacity Development III. Facilitate Dialogue INTERNATIONAL MONETARY FUND 5 5
I. Monitor Trends Fund s Multipronged Approach V. Engage in cases involving tailrisk scenarios Multipronged Approach II. Monitor Risks & Drivers IV. Tailor Capacity Development III. Facilitate Dialogue INTERNATIONAL MONETARY FUND 6 6
I. Monitoring Trends The decline in CBRs, while stabilizing in some regions, remains a concern Number of active counterparty countries by region (average percent change across region) Recent Trends in CBR Withdrawal 5% Jan. 2011 - Jun. 2017 Dec. 2016 - Jun. 2017 0% -5% -10% -15% -20% -25% Africa Americas (excl. North America) North America Asia Oceania Europe (excl. Eastern Europe) Eastern Europe Source: FSB, SWIFT Watch, National Bank of Belgium. INTERNATIONAL MONETARY FUND 7 7
Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 I. Monitoring Trends Recent Trends in CBR Withdrawal 0.770 along with the concentration of active correspondents. Concentration of active correspondents (GINI coefficient per corridor, 3mo. moving avg.) 0.769 0.768 0.767 0.766 0.765 Source: FSB, SWIFT Watch, National Bank of Belgium. INTERNATIONAL MONETARY FUND 8 8
Change in cost of remittances I. Monitoring Trends The macroeconomic impact appears contained, but challenges remain 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. Changes in the number of AC vs cost of remittances (in percent, 2012-2016) Cost of remittances by destination region (in percent of amount sent) 100 12 80 2011 2012 2013 2014 2015 2016 2017 60 10 40 20 0-20 -40-60 -80 8 6 4 2-100 -30-20 -10 0 10 20 30 Change in number of active correspondents Source: Staff calculations based on FSB (2017), World Bank Remittances Prices Worldwide, World Bank Migration and Remittances Database. 0 Pacific (Small States) East Asia & Pacific (excl. Small States) Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa 9 INTERNATIONAL MONETARY FUND 9
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 Source: FSB. INTERNATIONAL MONETARY FUND 10 10
I. Monitor Trends Fund s Multipronged Approach V. Engage in cases involving tailrisk scenarios Multipronged Approach II. Monitor Risks & Drivers IV. Tailor Capacity Development III. Facilitate Dialogue INTERNATIONAL MONETARY FUND 11 11
New Capital Requirements New Liquidity Requirements Post-GFC Macroeconomic Conditions Increasing Compliance Requirements Lack of Clarity and Consistency of Regulatory Expectations High Profile Enforcement Actions NPAs/DPAs/ Consent Orders Respondent Bank's Customer Base and Business Model Compliance Framework of Respondent Bank, including for AML/CFT Jurisdiction's Risk Environment, including ML/TF Risk Obstacles to Risk Management II. Monitoring Risks & Drivers Drivers of CBR pressures remain the same CBR Pressures Business relationship based on trust Profitability Risk Assessment Capital Income Cost Risk Tolerance Specific CBR Risk INTERNATIONAL MONETARY FUND 12 12
II. Monitoring Risks & Drivers Drivers which have recently gained more attention Corruption Transparency - Beneficial Ownership New International & Bilateral Sanctions INTERNATIONAL MONETARY FUND 13 13
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 Source: FSB. INTERNATIONAL MONETARY FUND 14 14
II. Monitoring Risks & Drivers 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 3% 8% 31% 22% Number of staff reports with reference to CBRs per Region (2014-2017) 12% 10% 43% 16% 2014 2015 201 201 AIV Staff Report Published with 6 mention to 7 CBR AIV Staff Reports Published 19% WHD APD MCD AFR EUR 15 INTERNATIONAL MONETARY FUND 15
II. Monitoring Risks & Drivers 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 INTERNATIONAL MONETARY FUND 16 16
I. Monitor Trends Fund s Multipronged Approach V. Engage in cases involving tailrisk scenarios Multipronged Approach II. Monitor Risks & Drivers IV. Tailor Capacity Development III. Facilitate Dialogue INTERNATIONAL MONETARY FUND 17 17
III. Efforts to Facilitate Dialogue Global partners National authorities G20 & G24 & FSRBs Across regions Regional partners Private sector Global Banks Domestic Banks Money Service Businesses INTERNATIONAL MONETARY FUND 18 18
The FSB Action Plan Data collection and analysis Monitoring based on SWIFT data FSB survey of 345 banks World Bank case studies Capacity building Inventory of technical assistance Workshop for TA providers Capacity building by private sector IMF monitoring framework Source: FSB. Clarifying regulatory expectations New FATF guidance Revised BCBS guidance Next follow-up on national application Technical solutions to improve the efficiency of due diligence 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 INTERNATIONAL MONETARY FUND 19 19
FSB Stocktake of Remittance Service Providers Access to Banking Services 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 INTERNATIONAL MONETARY FUND 20 20
III. Efforts to Facilitate Dialogue Fund s Regional Initiatives Joint AMF-IMF High-Level Workshops UAE, October 2015 UAE, September 2017 Africa High Level Seminar Washington D.C., October 2017 South Africa, May 2018 Caribbean Roundtables Barbados, February 2017 Jamaica, November 2017 Bahamas, October 2018 Pacific Roundtables Australia, February 2018 New Zealand, February 2018 INTERNATIONAL MONETARY FUND 21 21
III. Efforts to Facilitate Dialogue Outcome of regional initiatives highlighted the following measures to address CBR pressures Measures identified by private sector Major/Good Progress in Implementing Enhancing communication between banks, removing impediments to information sharing Consolidating transaction traffic down-streaming Limited Progress in Implementation, so far KYC utilities, LEI, digital identity Fintech Strengthening capacity of respondent banks Improving regulatory and supervisory frameworks, including for AML/CFT Regional payment and clearance systems Setting up of public banks INTERNATIONAL MONETARY FUND 22 22
III. Efforts to Facilitate Dialogue SSA Seminar highlighted the following measures to address CBR pressures Key Solutions 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 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. INTERNATIONAL MONETARY FUND 23 23
I. Enhance Data Gathering Fund s Multipronged Approach V. Engage in cases involving tailrisk scenarios Multipronged Approach II. Monitor Risks & Drivers IV. Tailor Capacity Development III. Facilitate Dialogue INTERNATIONAL MONETARY FUND 24 24
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 INTERNATIONAL MONETARY FUND 25 25
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. INTERNATIONAL MONETARY FUND 26 26
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. INTERNATIONAL MONETARY FUND 27 27
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: 3 rd Caribbean roundtable (October 2018) 2 nd Pacific roundtable (Feb. / March 2019) INTERNATIONAL MONETARY FUND 28 28
Thank You