CIBC announced in November that it would offload its majority share in CIBC FirstCaribbean in a deal worth just under US$ 800mn. The announcement came on the heels of a similar withdrawal by Bank of Nova Scotia which has now closed the sale of its banking operations in seven Caribbean markets, including Saint Lucia. Banks cutting back is not new to the Caribbean, which has had to adjust to a ‘new normal’ in banking following the global economic crisis and subsequent wave of de-risking, but a recent roundtable summit on the issue suggests that the region is charting a way forward, with the help of international private and public sector partners.
What is de-risking and why is it a problem?
The Caribbean is home to many international banks who have a strong presence in the region but remain headquartered abroad, such as Royal Bank of Canada, CIBC FirstCaribbean and Bank of America.
De-risking occurs when these global banks decide to cut ties with their regional counterparts, either because of a lack of business, security concerns or simply retrenching to streamline their operations. Since the 2008 global economic crisis, regulators and watchdogs have become more wary of financial impropriety leading to a crackdown that has affected the worldwide banking infrastructure. Compliance regulations are stronger than ever, and AML/CFT requirements are becoming ever more strict. In this punitive atmosphere, many banks have decided that their overseas counterparts in high-risk areas like the Caribbean are simply not worth the risk and/or the paperwork.
When financial institutions sever a Correspondent Banking Relationship (CBR), it has a ripple effect. Middle-class jobs are lost in the high-paying banking sector and cross-border trade is stifled. It also hinders the flow of remittances, current and future investment is put at risk and it adds to the negative perception that the Caribbean is not just a bad place to do business but fiscally corrupt.
A 2017 survey of 12 Caribbean countries, published by the Caribbean Association of Banks, found that 21 out of 23 banks on those islands had lost at least one CBR, with the Eastern Caribbean particularly affected. CARICOM reports that 25-75 per cent of the 50 banks operating across member states have either lost CBRs or faced restrictions on CBR services.
De-risking discussions
In November Prime Minister Chastanet and other CARICOM representatives attended a roundtable meeting with the US House Committee on Financial Affairs to examine the de-risking crisis. The attendee list was a who’s who of influential and powerful figures including US Congresswoman Maxine Waters and senior bankers from six major US banks including Wells Fargo and Bank of America.
The CARICOM delegation, which included Jamaica’s Finance Minister Nigel Clarke and CARICOM Secretary-General Irwin LaRocque, came out of the discussions expressing satisfaction with the commitment of US legislators and banks to work with the Caribbean. Wells Fargo and Bank of America reportedly both reaffirmed their desire to maintain a presence in the region.
Chastanet commented: “As CARICOM, we thought it vital that we engage the US government and key industry players on actions to address decisively the actual and potential challenges posed to our economies by the de-risking actions that have been taken by US banks. Our domestic banks rely on correspondent banks to access international financial markets and overseas geographic regions. Simply put, without correspondent banking our economies could grind to a halt. I could not underscore enough the serious ripple effect that kind of economic decline would have for individual countries, the region and the wider hemisphere.”
As a close and powerful neighbour, it is in the US’s interest that Caribbean banking thrives. At the peak of de-risking, the Caribbean Development Bank warned that continued loss of CBRs would drive people towards the shadow economy, potentially increasing serious crimes, from money-laundering to smuggling and terrorism. With an escalating security threat on their unofficial third border, it’s unsurprising that the US is pushing hard for a solution.
Finding solutions
To address the effects of de-risking, stakeholders have looked at a number of possible avenues. Last summer Antigua and Barbuda took a proactive approach, seeking to buy out all the Scotiabank operations in the country. While those negotiations ultimately fell apart, it signals a more hardline approach by Caribbean governments desperate to retain banking operations.
Antigua’s Prime Minister Gaston Browne has also called for the creation of a Caribbean bank that would fill the gap left by retreating foreign providers, telling local media: “There may even be the need for us to have a Caribbean bank; that is, a bank owned by various indigenous banks in the Caribbean and one that would have branches in the US diaspora, UK diaspora and Canadian disapora.”
While a Caribbean bank may be in the works, the focus in the short-term is on repairing and rebuilding the region’s reputation – damaged by years of repeated blacklisting and hyperbolic tax-haven style headlines. Caribbean countries, assisted by the CAB, have been heavily investing in training their banking professionals and strengthening their AML/CFT frameworks, putting compliance front and centre. The OECS is looking at creating a Single Compliance Department – a proposal that was discussed and approved at the Washington roundtable.
Having the US onboard will doubtless give some impetus to the region’s efforts to push back against de-risking but it will be a long road to recovery for the banking sector. As Prime Minister Chastanet told parliament in late November, fresh from the high-level talks: “There is considerable work left to be done if we are to halt and reverse the trend towards de-risking and ensure CBRs are re-established.”
