Large banks are cutting ties with small countries Should Guyana be concerned? Pt 3


In this edition, consideration will be given to the perspective of some global banks, why they are opting to cut ties with small countries and what has been shaping their decisions on cross-border services.


The International Monetary Fund (IMF) says that there are several intertwined factors.


It believes that what affected countries may perceive as a knee-jerk reaction by global banks may in the end, simply reflect rational business decisions.


According to IMF’s boss, Christine Lagarde, one such factor is the broader re-assessment of business lines based on cost-benefit considerations. Global regulatory reforms have effectively raised the cost of capital for banks. As a result, high-volume, low-return businesses – such as correspondent banking – have become less appealing.


Lagarde said that another factor quoted to the IMF has been the considerable uncertainty among banks concerning their regulatory obligations. She said that the possibility of large penalties and reputational risks associated with enforcement on sanctions, tax transparency, and anti-money laundering seems to increase the costs of compliance for global banks in significant ways.


Since these are the very issues where regulators have tried to provide clarity, this suggests that both sides still have some work to do in order to reach a better understanding.


“I should note that this was particularly a concern for European banks in the context of U.S. regulations – which is important as they all have dollar-based operations here in the United States,” expressed the IMF Chief.


So where does IMF’s fact-finding exercise leave us today?


It seems clear that all parties involved pursue rational objectives, but don’t quite see eye-to-eye with each other. It is a collective action problem that calls for a collective solution.


There is a need for action on the part of the countries affected, the regulators, and the global banks. All three have a stake in addressing this issue.


Lagarde said that clearly, the affected countries themselves need to be called to task. She said that they need to upgrade their regulatory and supervisory frameworks to enhance compliance with international standards, especially in the areas of AML/CFT and tax transparency.


She said that Regulators also have an important role to play. She said that they should continue their outreach and dialogue with global banks and affected jurisdictions to clarify – and consistently communicate – regulatory expectations.


The IMF Boss also believes that there is also room to collaborate further with other public authorities to improve compliance and mitigate disruptions in key business categories such as remittances.


In the United States, for example, the Federal Reserve Bank of Atlanta set up an automated clearing house for cross-border payment services. This has been vital in securing remittance flows to more than 25 countries in Central and South America.




Many people probably do not know that one of the IMF’s most important activities is providing extensive support to its member countries in improving their regulatory frameworks to meet international standards.


The Financial Stability Assessment Program introduced in 1999 has been instrumental in identifying weaknesses and guiding remedial training and technical assistance programs, including in the area of AML/CFT.


Lagarde said that over the past decade, technical assistance on AML/CFT has been provided to 118 countries already, and we currently have 37 ongoing projects in 29 countries. By now, almost all member countries have had at least one AML/CFT assessment. This assistance helps countries identify gaps in their AML/CFT frameworks, and is vital to the effective implementation of the risk-based approach to regulation.


In some cases, IMF efforts have gone beyond assessments. For example, The IMF can invoke its convening power.


“We have organized a series of discussions with our partners at the Financial Stability Board and the World Bank, bringing together policymakers and the private sector to develop a shared understanding of the drivers of the phenomenon. And finally, through our membership in the Financial Stability Board, we will support further clarification of international standards and contribute to their implementation,” expressed Lagarde.


For the IMF, a strong and open international financial system is key to restore momentum in the global economy.


But Lagarde insists that all actors have a part to play: countries need to upgrade their regulatory frameworks; regulators in key financial centers need to clarify regulatory expectations and ensure consistent application over time; and global banks need to avoid knee-jerk reactions and find sensible ways to reduce their costs.


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