Managing Director of the International Monetary Fund (IMF) Christine Lagarde has called on countries to upgrade their regulatory frameworks, on regulators in key financial centers to clarify regulatory expectations and ensure consistent application over time, and on global banks to "avoid knee-jerk reactions" and find sensible ways to reduce their costs.
Lagarde was discussing the challenges posed by the withdrawal of correspondent banking relationships and what can be done about it. The executive said that affected countries often vulnerable and they include small island economies and countries in conflict.
"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," she said.
Although Lagarde was addressing the matter from a global perspective, her comments gave fair warning for The Bahamas in light of the recent increase in the loss of corresponding banking relationships. Guardian Business reported the IMF's finding in May that in The Bahamas, five financial institutions -- representing about 19 percent of the assets of the banking system -- lost one or more correspondent banking relationships.
She said that banks are withdrawing from smaller countries because large global banks are under pressure to raise capital, streamline their business models, and re-evaluate their risk exposures. In the Caribbean alone, Lagarde pointed out that in May at least 16 banks across five countries (including the five in The Bahamas) have lost all or some of their correspondent banking relationships.
She argued that countries affected by the a loss of correspondent banking relationships need to upgrade their regulatory and supervisory frameworks to enhance compliance with international standards, especially in the areas of AML/CFT and tax transparency.
"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."
"Countries where large global banks are situated could further help improve clarity by fostering a common domestic understanding of the regulatory perimeter between the different actors that are involved. This includes the government, bank regulators, other financial supervisors, as well as judicial agencies that are involved in supervising and enforcing relevant legislation," she said.
Lagarde said she encourages banks to work collectively on reducing compliance costs and maintaining the financial lifeline for those who need it most, and can use innovative solutions like "Know Your Customer" (KYC) utilities to centralize information on customer due diligence.

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