Correspondent Banking decline hampers Island economies, study finds

Jun 10, 2024 | Blog, News, Pacific

In recent years, the decline of Correspondent Banking Relationships (CBRs) in Pacific Island countries has emerged as a significant economic challenge, impacting everything from trade to remittances and financial inclusion. The phenomenon, commonly referred to as “de-risking,” involves the termination or restriction of banking services by financial institutions to avoid risk rather than manage it. This issue has profound implications for the economies and populations of Pacific Island nations, which heavily rely on these relationships for cross-border financial transactions.

At the Pacific Islands Forum (PIF) Economic Ministers meeting held in Vanuatu in August 2022, concerns were raised about the continued withdrawal of CBRs across the region. These banking relationships are critical as they enable cross-border payments, including remittances and export revenues. The loss of CBRs poses a direct threat to accessible and affordable banking services, essential for attracting investment, promoting trade, and supporting the livelihoods of many Pacific Islanders, including seasonal workers and small and medium enterprises (SMEs) .

The PIF Secretariat, recognising the gravity of the situation, commissioned a study to understand the extent of CBR decline, its impact, and potential solutions. The study, conducted with the assistance of the World Bank, revealed that the decline in CBRs has led to higher remittance costs and hampered economic activities in the region. The loss of these banking relationships forces transactions into less secure and more costly informal channels, exacerbating financial exclusion and economic instability .

One of the major contributing factors to the decline in CBRs is the stringent anti-money laundering (AML), combating the financing of terrorism (CFT), and proliferation financing (PF) regulations. While these regulations aim to mitigate financial crimes, they have also led banks to de-risk by terminating services to clients perceived as high-risk, including entire regions like the Pacific Islands. This response is often due to a lack of adequate data to assess actual risk levels accurately and the high costs associated with compliance .

The report outlines several recommendations to counter the decline of CBRs. Key among these is the improvement of AML/CFT/CPF risk management through better data collection and enhanced regulatory frameworks. The Pacific Islands Forum (PIF) is encouraged to support the piloting of a draft remittance corridor risk assessment methodology developed by the World Bank and the International Monetary Fund (IMF). This would help provide better risk-related information to banks and regulators, potentially reducing compliance costs and making it easier to maintain CBRs .

Additionally, the report recommends strengthening the enabling environment for CBR services by supporting digital financial services and improving national financial infrastructures. Another critical measure is the development of a CBR resilience framework, which includes setting targets for the number and quality of CBRs each country needs to maintain resilience against de-risking. This framework should be monitored annually to track progress and adjust strategies as necessary .

The decline of CBRs in the Pacific is not just a financial issue but a socio-economic one that affects the very fabric of these island nations. Addressing it requires coordinated regional efforts, sustained action, and a combination of strategies tailored to the unique challenges of each country. By implementing these recommendations, the Pacific Islands can hope to mitigate the adverse effects of de-risking and secure a more stable and inclusive financial future.

Download the full report here:

See our earlier story on this subject here.