By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank's governor yesterday said correspondent bank 'de-risking' remains a "great concern", given that the Bahamas' current economic viability depends on these relationships.

John Rolle told Tribune Business that the regulator had seen no further deterioration in Bahamian banks' international ties since its August 2016 survey, which found that almost 25 per cent of respondents had lost at least one correspondent relationship.

But, emphasising that the danger had not gone away, Mr Rolle said the global financial system access provided by correspondent banks was "very critical" to the business models of Bahamian financial institution and the wider economy.

"We have not taken note of any further shift," the Governor replied, when asked whether relations between Bahamas-based financial institutions and their correspondents had deteriorated further over the past 14 months.

"But that is not to say the issue is not being closely monitored, or not on the minds of the banks," he added. "We have not noticed any further shifts or tensions in this regard, but it is a matter of great concern to the sector.

"We still see the access to correspondent banking as being very critical to the business model, or the viability of the business model, for our financial institutions. Those in the international sector, because that's part of the product mix that makes it feasible for them to provide services to their clients.

"In the local sector, it's critical to providing payment/settlement services, whether it relates to trade or investments that flow across our borders."

Mr Rolle conceded that the Bahamas' "daily existence" was heavily dependent on access to the global financial system and commerce, which is currently provided by foreign banks via their correspondent relationships with local institutions.

"This is an economy where there is a high degree of dependency on international transactions for daily existence," he told Tribune Business, "whether it's tourism or income-earning sectors, and all the requirements for imports.

"We source lots of goods from abroad, and also consume a lot of services in every sector of the economy. The ability to have access to all these services depends on making payments for these services."

Mr Rolle's comments underscore just how serious a threat is posed by correspondent banking 'de-risking', not only to Bahamian financial institutions but, potentially, the functioning of the entire economy as we know it.

Correspondent relationships allow Bahamian financial institutions to use their physical and electronic banking infrastructure to conduct business in their countries, enabling transactions to clear and be settled on a timely basis, and foreign currency deposits to be taken.

Yet banks in major industrialised countries have frequently severed correspondent relationships in recent years, with the Caribbean region among most heavily impacted.

The move is being driven by the 'risk/reward' analysis, with developed country banks perceiving correspondent relationships with their Caribbean counterparts as too 'high risk' when compared to the financial rewards.

They are especially concerned that Caribbean banks are susceptible to financial abuses, such as money laundering and terror financing, which could lead to financial sanctions being imposed on themselves by home country regulators.

While the Bahamas has avoided any major fall-out to-date, a recent International Monetary Fund (IMF) working paper revealed that the impact has been felt by the private sector and Bahamian consumers through increased compliance costs and fees.

The Fund said fees for cross-border transactions had increased by as much as 186 per cent between 2011-2015, the greatest rise in the Caribbean. Wire transfer fees alone grew by 20 per cent over that same five-year period.

Mr Rolle did not comment directly on the IMF paper's findings, which were taken from the Central Bank's own August 2016 survey, but he indicated that the fee increases were consistent with international experience.

"In countries where there's a high dependency on money transfer services to get funds from one place to the next, the cost of wire transfers has started to increase in regions where correspondent banking challenges are greatest," he said.

"That is because the money services businesses are incurring higher costs in terms of compliance and monitoring systems they have to put in place. For some of those money services businesses, they may be encountering increased costs because they have to align themselves with more costly correspondents."

Banking fees, and their constant increases, have frequently provoked anger among many Bahamian consumers. The Central Bank, though, has resolutely refused to impose price controls or other draconian measures demanded by the public, warning that these would have adverse, unintended consequences.

The regulator has frequently stressed that competition and consumer education are better solutions, and Mr Rolle yesterday said the Central Bank was preparing to conduct "more research in terms of some the structural factors that are driving the costs of services".

He added that "financial inclusion" and access to banking services remained a priority for the Central Bank, and said: "From that point of view, the ability of the sector to provide services in a cost efficient manner is going to be important.

"We also continue to see the importance of credit markets, in terms of the risk and cost of credit. A risky and costly credit market can lead to costs showing up in other areas where financial services is provided."

Mr Rolle declined to comment on the IMF paper's "anecdotal evidence" that some Bahamian financial institutions had lost correspondent relationships because of the latter's concerns about them doing business with the web shops.

Instead, he told Tribune Business: "As a jurisdiction we have to continue to strive to show we have a holistic approach to dealing with money laundering risks, irrespective of where they originate."

The Central Bank governor said the Bahamas' efforts to combat correspondent bank 'de-risking', and its consequences, were directly linked to the strength of its anti-money laundering/counter terror financing regime.

Improvements in this area will improve 'risk perceptions' of the Bahamas among foreign governments and banks, which is why the Government, Central Bank and others are moving to rapidly address deficiencies identified by the Caribbean Financial Action Task Force (CFATF) in its recent assessment of this nation.

"We need to continue to work to reduce the risk assessment for the jurisdiction," Mr Rolle said. "That speaks to the efforts of the Central Bank and other regulators to continue strengthening their systems, and how they interact with the sector.

"For us, one of the key criteria is really to push ahead and show the documented improvement in the quality of our anti-money laundering and counter-terror financing regime. We're going to continue to work for improvements in that area.

"Aside from making sure our financial institutions deliver on their responsibilities, we will be continuously strategising around ways in which we make the sector less cash intensive, and we get more transactions happening in ways that make it easier to be monitored and less susceptible to criminals and other elements."

He also acknowledged that increased compliance pressures imposed on Bahamian financial services providers had resulted in rising fees for consumers, as the extra costs and bureaucracy