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Bank of Guyana, Govt. join forces to study de-risking on local banks
Local and international financial issues which pose a threat to the stability of the nation’s economy
Finance Minister, Winston Jordan
remain under the watchful eye of the Bank of Guyana and the Ministry of Finance. In fact, one of the crucial factors being closely monitored by the two bodies is de-risking.
According to Central Bank Governor, Dr. Gobind Ganga, Guyana’s financial system has been threatened by de-risking with Bank of America giving notice to a few banks of its intention to cease doing business with them.
He said that although other banks showed an interest to fill the void, the conduct of international banks to terminate correspondent relations with legitimate clients (banks and non-banks) as a way of mitigating legal and other risks can be detrimental to the economic and financial health of economies such as Guyana.
Dr. Ganga said that specifically, derisking curtailed countries’ access to essential cross-border financial services such as trade finance and international money transfers, which are essential for growth and development.
The Ministry of Finance is also keeping a close watch on this behaviour by international banks.
According to the Minister of Finance, Winston Jordan, local banks in small economies rely on “correspondent banks” with a global presence to connect them to the international financial network. He said that these relationships with correspondent banks allow local residents to receive remittances from abroad, tourists to access cash from their home accounts, and facilitate the transfer of funds needed for trade and investment.
He acknowledged that recently, there has been a global trend of correspondent banks terminating their relationships with their local partners.
Central Bank Governor, Dr. Gobind Gang
In fact, through May 2016, at least 16 banks across five countries in the Caribbean have lost all or some of their correspondent banking relationships. Jordan said that one reason correspondent banks may drop their relationships with local banks is concerns about meeting new, stricter rules related to Anti-Money Laundering and Combating the Financing of Terrorism.
Finance Minister Winston Jordan said that this same concern may apply with regards to other regulations as well, such as the tighter prudential regulation that was put in place in many countries following the global financial crisis.
He said, “International banks cite excessive compliance costs, unprecedented penalties, vague legal standards and escalating litigation costs as reasons for severing correspondent bank relationships. When a correspondent bank drops a local market (this could be a bank or a country) over concerns about regulatory compliance or other risks, this is called de-risking.”
The economist continued, “When a bank loses its correspondent banking relationships, the impact can be mitigated by putting in place arrangements that allow bank clients to continue to access services. Clients can be sent to other local banks that still have correspondent banks to complete international transfers. Alternatively, central banks can process payments on behalf of local banks through their own correspondent banking relationships.”
However, as transfers are diverted through fewer channels, the Finance Minister said that the rising volume of transactions may pose a challenge.
Jordan said that de-risking is already affecting Guyana’s financial sector. He cited the fact that in June, last, Bank of America announced that it would no longer act as a correspondent bank for the Guyana market.
While Guyanese banks are currently served by other correspondent banks, Jordan said that the decision underscores the importance of addressing these perceived risks.
“While Guyana has taken recent steps to strengthen its Anti-Money Laundering and Combating the Financing of Terrorism framework, further work remains to be done,” Jordan articulated.
He noted that the International Monetary Fund (IMF) has urged the Government to accelerate the implementation of the action plan agreed with the Financial Action Task Force. Jordan said that the Government is also working with the Bank of Guyana to improve financial sector supervision, and to monitor the risk from de-risking on local banks.
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