Large banks are cutting ties with small countries: Should Guyana be concerned? Pt 1.
For a number of reasons, all is not well in the financial world of some small countries like Guyana. And why is this taking place? Well, some large banks are simply calling it quits on its relationship with these small nations.
Take for example, the fact that Bank of America, the largest correspondent bank in the United States of America dealing with local banks, will be cutting ties with several commercial banks in Guyana by the end of August.
Central Bank Governor, Dr. Gobind Ganga, said that this is a move that is also happening in the Caribbean and that the entire region is being affected. Other countries would have had ties cut since last year with Bank of America.
Ganga opined that Bank of America’s decision could not solely be attributed to de-risking, but to other factors as well.
“There are a number of factors. One is de-risking. They may want to deal with bigger customers or (they may have) a higher level of liquidity. It (could) also be a question of profitability.”
Back in May, Attorney General Basil Williams had expressed worry about the possibility that Guyana may suffer as a result of de-risking. De-risking happens when financial institutions exit relationships with and close the accounts of clients who they deem to be “high risk.”
The move however, has caught the attention of one of Guyana’s international lenders, the International Monetary Fund (IMF).
IMF’s Boss, Christine Lagarde acknowledges that while countries like Guyana are “smaller” financial players of this world, a well-functioning financial system is just as essential for their growth as it is for the large economies.
She believes that these countries, too, need to ensure an efficient allocation of capital. And they need ways to empower the poor and the small to participate in the economy.
Lagarde went further to note her concern that there is a risk that small countries may become more marginalised.
She said that this has to do with the fact that large global banks are under pressure to raise capital, streamline their business models, and re-evaluate their risk exposures. As a result, Lagarde said that many of them have been in the process of closing business lines that they consider marginal to their bottom line, or detrimental to their risk profile.
“So, large banks are withdrawing from smaller countries. This is perhaps most evident in the decline of correspondent banking relationships – a serious concern for those countries that have few avenues for participating in the global payment and settlement systems.”
The IMF boss said that it is important to understand that Correspondent banking is like the blood that delivers nutrients to different parts of the body. It is core to the business of over 3,700 banking groups in 200 countries.1 A global bank like Société Générale, for example, manages 1,700 correspondent accounts and processes 3.3 million correspondent transactions every day. 2
But, why should we care about this problem?
The IMF boss posits that affected countries often are very vulnerable – they include small island economies and countries in conflict. She said that these are countries with minimal access to financial services in the best of circumstances. And there are also larger countries whose economies rely heavily on cross-border flows, such as remittances, and where development is now at risk.
And even if the global implications of these disruptions are not visible so far, she said that they can become systemic if left unaddressed.
Lagarde stressed that there are serious challenges posed by the withdrawal of correspondent banking relationships but a few things can be done about it.