Banking has gone global, but what does this mean for the Caribbean?
In the years before the worldwide financial crisis, banking became global. Financial institutions began to dissolve national borders and make connections across continents. Then came the collapse. As the world struggled to regain its financial equilibrium, blame fell on bankers, with many accusing the international system of spreading the chaos around the globe. International banking took a reputational hit and its upwards trajectory stalled.
A decade later, it’s time for a revival. Despite the risks, international banking has a significant role to play in increasing capital, boosting liquidity and encouraging technological innovation. It can be a driver of economic growth and a weapon against poverty, provided it operates within a policy framework that works to maintain financial stability.
Caribbean nations have long been aware of the perks and pitfalls of dealing with global bankers. In the wake of the financial crisis, many international operators chose to scale back their operations and this de-risking led to an exodus from offshore hubs seen as potential liabilities. But while it may have faltered, the sector remains strong. In 2013, almost 50% of banks in Latin America and the Caribbean were foreign institutions. In order to leverage the benefits of global banking, it’s important that the Caribbean stays ahead of developments in the sector.
According to the World Bank Group’s Global Financial Development Report 2017/2018, international banking will be shaped by three major trends in the near future: advances in technology, South-South banking and the use of alternative sources of funds.
Whether through crypo-currencies, data protection, mobile banking or e-commerce, FinTech (financial technology) is revolutionising the global banking landscape. Large global banks with the resources to invest heavily in research and development will be the ones to watch in this important area. As the sector grows, FinTech firms and financial institutions are developing profitable partnerships that allow the latter to extend their reach all over the world.
FinTech is helping banks reach a sector of the population that has been underserved, and encouraging competition by pushing bankers to introduce ever more efficient, and flexible, services. Getting ahead of the curve on FinTech will make Caribbean nations more attractive for foreign banks as they seek to do more digital business.
The pace of change in this rapidly-evolving area, however, is such that regulators are struggling to keep up. As this niche develops, policymakers will have to focus on areas such as customer education, data security and discriminatory lending, while bearing in mind that too much regulation risks stifling the market. Balancing innovation with regulation requires a light touch, which has led some countries to develop a ‘FinTech sandbox’. This allows for FinTech services to go live with limited regulation in a controlled situation so that regulators and firms can troubleshoot potential problems.
South-South banking refers to transactions between developing countries. It’s an area of particular interest to the Caribbean, given its de-risking challenges. As banks from the north regroup and retrench, opportunities lie elsewhere leading to a more regional focus. This regionalization could prove key for the Caribbean.
Co-operating to develop regional regulation and share expertise would lead to a more united Caribbean, and a united front would in turn give the region greater political and economic power when negotiating with global groups such as the Organisation of Economic Co-operation and Development, and the G20.
At the customer level, South-South banking can provide a more tailored level of care. Using a bank that, while foreign, still has the necessary regional knowledge can help clients feel more at ease. Given that most businesses in the Caribbean are small or micro-sized enterprises, this customised level of care is particularly appropriate.
With developing country banks investing within their region, either through cross-border transactions or creating a bricks and mortar operation, the profit, skills and knowledge generated stays within the region. The benefits, however, must be weighed against the drawbacks. Greater South-South banking limits the exposure of those in the sector to more advanced technology and expertise which may curtail growth in the sector over the long-term.
The 2008 financial crisis showed just how important it is to have a buffer for the markets, in the form of alternative sources of funding. After the crash, wary firms began substituting cross-border bank credit with capital market funding as a way to offset the damage. Taking a holistic view of the global financial system allows firms to cushion themselves against risk through a mix of bonds, stocks and international loans.
This would suggest a decline in bank funding and therefore a contraction with global banking. However, there is still a segment of smaller firms which don’t have access to capital markets, or are intimidated by diversifying in this way. For those small-scale operators, banking will always remain their preferred first choice.
BALANCING RISK WITH BENEFIT
Global banking brings benefits, but also risk. The former can only be maximised with the proper regulatory environment and adequate infrastructure. A welcoming host country with effective institutional support and supervision can encourage foreign banks to develop hubs, making it less likely that they will retrench when times get tough. And as foreign entities diversify and expand, they not only contribute to the host economy, but encourage competition within the domestic sector.
In introducing the Global Financial Development Report, World Bank Group Director of Research Asli Demirgüç-Kunt said: “International bank lending remains a vital source of finance for developing countries, although its composition has been changing since the crisis. International banking activities have the potential to improve the degree of competition in the local banking sector, help upgrade skills, and improve the efficiency of resource allocation. Through threat of exit, international banking can also discipline domestic financial policies, regulations and supervisory practices and weaken the political entrenchment between domestic financial institutions and governments.
“Hence remaining open despite rising protectionism is essential for countries to continue to benefit from global flows of funds, knowledge, and opportunity.”