In recent years, the banking system of the Caribbean region has been influenced by a de-risking trend — namely, the cessation or limitation of business relationships with specific clients or entire countries to mitigate exposure to questionable transactions. De-risking strategies were actively implemented between 2015 and 2020 with the objective of risk reduction and enhancing transparency within the future financial community.
According to World Bank data, 64% of the Caribbean’s banking sector has been adversely affected by a significant reduction in correspondent banking relationships with foreign banks. For instance, in 2016, when major international banks initiated de-risking protocols and began winding down operations due to the elevated costs associated with comprehensive client due diligence, Belize lost 83% of its correspondent banking transactions!
Between 2011 and 2020, the most substantial contraction in correspondent banking relationships occurred in Latin America and the Caribbean Basin, approximately by 40% (see figure)*.
Correspondent banking services are fee-based, and smaller Caribbean Basin countries simply cannot generate a payment volume sufficient to offset the servicing costs.
The de-risking phenomenon in the Caribbean Basin creates challenges in transmitting and receiving funds through legitimate channels, which could result in the emergence of “shadow banking” as financial organizations seek alternative payment mechanisms. To mitigate issues associated with de-risking, the Caribbean Working Group on Financial Inclusion has developed a gamut of remedial measures. Among these is a mechanism designed to scale transaction volumes to a level that would be lucrative for major correspondent banks.
In the Bahamas, for example, an Anti-Money Laundering (AML) system has been implemented to attract global banks for collaboration — while strictly adhering to legislative requirements aimed at combating money laundering. This has expanded the scope of digital banking services and fortified the islands’ reputation among international investors.