By: Staff Writer
March 8, 2022
SWIFT data reveals that active correspondents decreased worldwide by nearly 25 percent in the last 10 years with the Caribbean making up over 49 percent of that number as de-risking for correspondent banking takes its toll, a new report by the Atlantic Council says.
A new report from the Atlantic Council, “Financial de-risking in the Caribbean: The US Implications and what needs to be done,” outlines critical factors on the impact of de-risking in the Caribbean and the effect it had on these fragile economies.
The report said: “…For the Caribbean to maintain a healthy presence for itself and the wider world, it needs to overcome challenges to financial development, access, and inclusion. The Caribbean is already facing severe challenges due to the COVID-19 pandemic and climate change. And, as the region looks to combat them and accelerate recovery and resilience, it needs access to the global financial system and the benefits that come with it. Caribbean countries lag behind many peer countries globally in terms of financial development, owing to their histories of volatile economic performance, vulnerabilities to external shocks, and issues related to their size and levels of development. These and related challenges have acted as breaks on inclusive growth and development.
“Exclusion from global finance through the withdrawal of correspondent banking relations (CBRs) has worrisome implications for the Caribbean. The broader importance of tourism means that economies are heavily reliant on access to hard currencies and the use of credit cards to process transactions from visitors. Loss of CBRs limits this ability for governments and hotels. CBRs are also integral to remittance flows to the Caribbean. Rising costs of transactions, due to costly regulatory requirements and fines, have put remittances to working-class populations in the region at risk, potentially inducing loss of livelihoods. CBRs are also needed for international trade and finance. Limited access to trade finance stunts development and economic growth for a region already struggling to recover during the pandemic.”
De-risking in the Caribbean is more than just about the Caribbean the report noted as certain products from the US and Europe are impacted in addition to remittances towards Caribbean countries. This decrease in remittances also limits access to trade finance “decreases purchasing power” and Caribbean countries ability to import goods. Tourism has also been affected as correspondent banking is “critical” to credit card settlement.
Important to this entire framework is the SWIFT network. The SWIFT is a Belgian cooperative society that serves as an intermediary and executor of financial transactions between banks worldwide. It also sells software and services to financial institutions. SWIFT does not facilitate funds transfer; rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other. To exchange banking transactions, each financial institution must have a banking relationship by either being legally organized as a bank or through its affiliation with at least one bank. SWIFT is linked to more than 11,000 institutions worldwide and has over 32m messages a day in its network in over 200 countries and territories the report noted.
The report also said about the importance of SWIFT: “Available SWIFT data suggest that two key indicators (the number of correspondent corridors and active correspondents) have declined over the past decade. An active corridor is a country pair (e.g., the United States and Jamaica) that processed at least one transaction. Correspondent relationships measure the number of banks that have sent or received messages. As a result, correspondents present in more than one corridor may be counted several times. From 2011–2020, SWIFT data show a steady and significant decline over the past decade in both the number of corridors and correspondents. In 2011, active correspondents and corridors stood at 127,254 and 10,818, respectively.”
It added: “In terms of currencies, US dollar transactions represented about 49 percent of the total value of transfers in SWIFT messages in 2020, followed by the euro and British pound. Other currencies represented about 18 percent of the total. By 2020, both decreased to 96,511 and 9,318, with Caribbean institutions among the most severely affected.
By region, the largest contraction in active US dollar CBRs was for Latin America and the Caribbean (LAC)—by about 43 percent— followed by Oceania and Europe. The Caribbean was among the hardest hit regions in terms of US-dollar (USD) correspondents, with a contraction of about 42 percent overall from 2011 to 2020.”
These losses in correspondent banking are critically important for Caribbean countries. It simply cannot do businesses in an increasingly globalized world if it is cut off from financial avenues.
While money laundering and drug trafficking proceeds are noted, the measures taken to remove correspondent banking facilities from the region is doing more to harm these countries than helping them to reform as more shadow banking structures have started to pop up in addition to Chinese financing that bypasses Western standards and are more liberal in how they do business with small, developing countries.