CaribZone Commentary: Aubrey Campbell – Wednesday, January 20th
Financial institutions in Jamaica and the wider Caribbean community are said to be bracing from a potential fall-out in their operations based on more stringent regulations from the Federal government. At a forum in Kingston, Jamaica, on Tuesday, January 19, Owen Arthur, the former prime minister of Barbados spoke on the emerging issue of correspondent banking, which has very significant regional implications.
For the benefit of our readership, Caribzone is pleased to present the full text of Mr. Arthur’s presentation on the matter.
REMARKS AT ROUND TABLE DISCUSSION ON CORRESPONDENT BANKING AT TALK OF THE TOWN, JAMAICA PEGASUS HOTEL
BY: OWEN S. ARTHUR BARBADOS
The matter which engages our attention today – issues related to Correspondent Banking – represents a formidable challenge for the Caribbean in and of itself.
But it assumes alarming proportions when viewed within the context of the totality of the challenge with which the Caribbean society has to grapple to assure itself of a stable and successful existence.
Caribbean countries are arguably now in a more vulnerable condition than they have ever been in their post-independent existence.
As a class, they are constantly having to make adjustments to accommodate far reaching changes in the environment within which their development takes place.
This has placed on them the responsibility of having to manage more complex transitions and transformations than any other group of nations.
They have had, and will continue to have to institute new arrangements by which to order their domestic affairs, central to which is the sustained and coherent implementation of fiscal consolidation programmes to restore order to their public finances.
However, in comparatives terms, the challenges surrounding the management of their fiscal consolidation programmes are modest relative to the difficult new circumstances that have, over the past two decades, affected their ability to successfully carry out cross border transactions.
To begin with, all Caribbean societies have been significantly and adversely affected by changes in International Trade Law, which have stripped them of the means by which they have traditionally protected domestic enterprises, and have required them to enter new reciprocal trade arrangements even with developed economies.
The toll taken on traditional industries in agriculture and manufacturing has been severe.
In addition, the “sunrise industries” which have been designated to be the engines to generate a substantial part of the growth for the future have themselves had to operate in an atmosphere of uncertainty by having to respond to extraregional initiatives such as the OECD Harmful Tax Competition Initiative, and more recently, the provisions contained in the USA Foreign Account Tax Compliance Act, and the OECD Base Erosion and Profit Shifting Project.
By further example, a World Bank Report of June 2014 “The Trade Environment and Trade Performance in the Caribbean” makes for very grim reading.
It reveals that in respect of every critical determinant of trade performance, including trade policy as measured by the level of tariff rates, trade facilitation as measured by the World Bank’s logistics performance index and the cost to export a container, and the efficiency and availability of shipping services as measured by UNCTAD’s liner shipping connectivity index, the Caribbean reflects the worst indices of any region in the world.
In addition, the region’s circumstances have not been assisted by the fact that in an era when so much of global economic activity is being driven by the provisions in bilateral trade pacts, the Caribbean had entered the fewest of any group of nations.
The region also stands, for the future, to be overwhelmed by new trade arrangements, such as the Trans Pacific Trade Pact, and new global supply and value chain arrangements by global enterprises that are bypassing the Caribbean.
For the Caribbean to attain and stay on a viable path to growth and development, a concerted effort has to be made to transform its economies from being trade-preference dependent economies which they have been traditionally, and debt-propelled economies which they have recently become, to being investment-driven economies, marked by a very high component of private foreign capital, and eventually, genuine export-propelled economies.
Indeed, over the immediate future, to create the conditions to generate strong growth, the Caribbean has to increase the ratio of private capital inflows to GDP, and to use such resource flows to help build new productive capacity which is capable of being competitive in a liberalized global economy.
As such, any new measure that stands in the way of enabling the Caribbean to significantly improve its cross border economic and financial transactions must be deemed to be a serious threat to the development of the region.
It is in such a context that the Corresponding Banking Challenge looms as the most recent, but perhaps the potentially most devastating threat to the stable and successful development of the region.
It is therefore important that the Caribbean does not allow itself to become the real but unintended victim of a global effort to reduce financial crimes, to fight against terrorism by reducing its sources of finance, and quite frankly, the efforts of major banking enterprises to enhance their profitability.
To begin with, unaddressed, the derisking that is at the centre of the Correspondent Banking issue, could serve to delink Caribbean economies from access to global finance at a juncture where they need to increase the ratio of capital inflows to GDP.
It can also increase the cost of access to such finance or force economic agents in the region to resort to illicit means, further damaging the image of the region. It can also do untold damage to the financial sector in the Caribbean.
For it has been well observed that the Caribbean financial sector is characterized by features such as shallow banking systems, undeveloped and highly concentrated financial markets and domestic currencies that are not internationally traded. Such characteristics predispose the Caribbean to having derisking take on a dimension that does not obtain elsewhere and which is more severe than in our jurisdictions.
There is of course a people’s dimension to this phenomenon. The Caribbean region annually receives almost US $10 billion in remittances. This has not only come to be the largest single financial inflow to the Caribbean. It has come to be the financial resource that has enabled countless Caribbean households to enjoy sustainable livelihoods.
The threat posed to by the Correspondent Banking crisis to Money Services Businesses that are involved in dealing with remittances is above all a threat to the stability of the society at large and hence has effectively to be countered.
There is now a general understanding of the fact that issues arising from Correspondent Banking relationships have become of central concern in so far as they have been triggered by the global effort to reduce financial crime, fight terrorism, and, after the 2008 Global Financial debacle, to strengthen financial systems by requiring financial institutions to meet more exacting liquidity and capital requirements.
The Caribbean cannot profess to wish to stand askance from this global initiative.
What it can and must do is to add its voice to those who are insisting that where rules and standards are set which are intended to be applied fairly and uniformly, this should be observed in practice.
In relation to the application of the rules to which reference was made earlier, the Guidelines promulgated by the Financial Action Task Force (FATF) require entities to adopt a Risk based approach whereby financial institutions only terminate customer relationships on a case by case basis where the money laundering and terrorist financing risk cannot be mitigated.
The wholesale cutting loose of clients, without evaluating their risks, was not intended to be a substantive part of the fight to combat global financial crime and terrorism. But this is precisely the direction in which the derisking exercise is taking the global financial community.
The global rules must be made to apply.
There is also merit in the region taking a stand in support of a revision of the new stringent liquidity coverage ratiosthat are part of Basel III, which have triggered much of the profitability related issues that have prompted correspondent banks to engage in derisking.
Basel III has in fact redefined and reduced the value of correspondent banking balances, and this has brought new adverse dynamics to the economics of the business as it has led to a situation where compliance costs and risks outweigh returns to the enterprises involved.
It is true, of this matter, as of every other facet of life, that Indignation without follow through is just another way of killing time.
There is much therefore that the Caribbean can and must do to fend off this existential threat.
First the Correspondent Banking crisis is one that does not apply only nor uniquely to the Caribbean but is one that has far flung implications for many countries across the globe.
There is therefore no requirement for the Caribbean to feel that it must fight this on its own. Rather, it must form strategic alliances and commit the resources to join the other many countries and institutions which have embraced this as being a legitimate cause to be fought for in every conceivable forum.
Secondly, the region must strain every sinew to ensure that its own rules, standards and enforcement mechanisms consistently meet global requirements in the fight against financial crimes and the fight against terrorism.
Ideally, this ought to be a well coordinated regional effort.
It can be made to be such if the Caribbean revisits and reenergizes its own efforts to integrate the regional economy.
In this regard, the creation of a single regional market, involving the removal of barriers to the movement within the region of the flow of goods, services, capital and labour, and the creation of new rights for the establishment of enterprise, was intended to be but the first phase of the CSME.
The second, involving the creation of a virtual single economy, as set out in the Girvan Plan of 2007, envisioned harmonized and coordinated regional actions and programmes, including regulatory and supervisory systems, that could significantly enhance the region’s ability to strengthen the economic and financial infrastructure on which its economy rests, and enable it to fend off threats and grasp opportunities through concerted regional actions where initiatives at the domestic level alone could not suffice.
Indeed, the Plan to move to a Single Economy called for the putting in place, for example, of a Regional Financial Services Agreement and a Regional Investment Code, which, if brought into existence, would have been designed to govern and bring order to the operation of the regional financial sector, and set out clear guidelines concerning that sector’s relationship with the global economy.
The issue now being grappled with concerning Correspondent Banking surely must accentuate the need for the Caribbean to have in place mechanisms that can allow it to respond on this matter, as on all others,in a coherent and sustained manner, rather than in a spasmodic way, to the challenges which will continuously come our way from having to function as the world’s smallest and most vulnerable economy in a turbulent and unforgiving global economic arena.
That was the great cause intended to be served by the creation of a virtual single regional economy.
It is the great cause to which the region must return, fortified by the conviction, expressed by Norman Manley in 1947,that “great causes cannot be won by doubtful men”.
I thank you for this opportunity, in this the land of the Manleys, to deliver myself of these remarks, and to extend best wishes for a successful conference.
The popular Caribzone (conversation) Commentary will appear next Monday, as per usual.