By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former Cabinet minister yesterday warned that the global correspondent banking retrenchment was threatening “a lifeline industry” vital to the Bahamas’ economic welfare and the development of its middle class.

Ryan Pinder, the ex-financial services minister, told the Organisation of American States (OAS) permanent council that the accelerated withdrawal of correspondent banks from the wider Caribbean region was “causing significant harm and a future threat to the economic viability” of its countries.

He said this so-called ‘de-risking’ by US-based banks and others was happening despite the Bahamas, and others, having complied with every demand imposed on them when it came to anti-money laundering and terror financing, plus information exchange and tax transparency.

Mr Pinder said the correspondent banking withdrawal was occurring because the Caribbean was perceived as having “a higher than average” compliance risk, and the “cost-benefit analysis” associated with continuing to provide services did not justify it.

The now-Graham, Thompson & Co attorney and partner said the two issues were interlinked, and that the correspondent banking contraction was linked to ever-higher regulatory and compliance costs.

“The World Bank has recently conducted a survey of the decline in correspondent banking,” Mr Pinder said.

“This survey found that more than half of the local banking institutions have experienced a decline in correspondent banking relationships, and that 75 per cent of the large banks providing such correspondent banking services have reduced their relationships. This is a dramatic contraction in the regional financial services industry.......

“The effect on the international financial services industry is paramount. This is an industry that in my country, the Bahamas, has single handedly created the middle class, elevating much of our population from poverty and creating an internationally well regarded and educated professional class,” Mr Pinder added.

“We have recently seen a shift in the industry away from global multinational banking institutions to private banking and professional services institutions, allowing for Bahamian entrepreneurs to participate in this once exclusively foreign-owned industry.

“The threat of loss of correspondent banking relationships to these independent institutions is creating an elevated level of difficulty, cost and, in some instances, closure of business lines for our institutions, directly affecting an element of our economy, the second contributor to GDP, and a lifeline industry for the economic welfare of our people.”

Correspondent banks are those that allow Bahamian financial institutions to provide services in their home countries, using their physical and electronic banking infrastructures.

They give Bahamian banks, and their clients, access to the international capital markets and financial system, enabling transactions to clear and be settled on a timely basis, and foreign currency deposits to be taken.

Foreign correspondent banks thus provide a vital gateway to the world. This access, though, has tightened in recent months as international banks respond to increased global regulatory pressures to either place tighter controls on or drop altogether their correspondent banking relationships.

While ‘de-risking’ has yet to occur in the Bahamas on a widespread basis, a Central Bank of the Bahamas survey of its licensees, published in January 2016, acknowledged that the pressure was on, with local institutions being subjected to “heightened due diligence” by their US correspondent counterparts.

Mr Pinder said the loss of correspondent banking relationships “has the potential to wreak severe damage on Caribbean economies”, given that financial services are their “lifeblood”.

As small, open economies, the Bahamas and other nations would suffer from reduced commerce and trade flows if international financial market access was reduced - a development that would impact tourism and foreign direct investment (FDI). Remittances sent back home by the Caribbean diaspora abroad would also suffer.

Mr Pinder argued that the Caribbean’s response ought to go beyond diplomatic initiatives and their current preoccupation with the US, given that it is the region’s largest trading partner.

He suggested that proposals such as buying insurance coverage for any fines incurred by correspondent banks were not workable, while the need for “extensive regulatory approvals” might impede the Caribbean’s creation of its own US-based institution to service the region.

Mr Pinder instead urged the OAS to develop recommendations for uniform international regulatory standards and a ‘level playing field’.

He added, for example, that this would help deal with correspondent bank demands that they needed to know ‘the customer underneath the customer’ - meaning, for example, the Bahamian beneficiary for whom a transaction was being conducted.

Mr Pinder also called for defined, and longer, notice periods to be given by correspondent banks when exiting relationships with Caribbean institutions.

“In one instance, where one bank had an adverse finding, the correspondent bank not only severed relations with that institution; it pulled out of the entire country,” he recalled.

“This has extended to the entire Caribbean, where institutions are abandoning the region because of a perception that might have been created by an experience with one institution in one country.”

Mr Pinder added: “If we can lessen the regulatory cost and burden, clarify the penalty structure for correspondent banking through transparency and rule making, and support solutions through technical viability and regulatory acceptance, we can preserve the long standing history of banking in the Caribbean region, we can preserve the economic viability for my children.”