How banks de-risking can undermine development

By Michelle Nurse On Jun 2, 2016

Correspondent banking — an essential service for international banking — has been on the decline in recent years. The trend has strong development impacts for small countries, particularly in the Caribbean. Photo by: frankieleon / CC BY via Devex)

[su_pullquote align=”right”]”In recent years large banks have come under increasing pressure from regulatory bodies to strengthen their oversight and controls for combating financial crimes, or face harsh penalties. The Financial Action Task Force — an anti-money laundering and financial terrorism watchdog — for example, requires banks to conduct thorough due diligence of their clients as well as of their correspondent account holders.”[/su_pullquote]The Panama Papers may have cast a glaring light on the risky side of international banking, but another trend has been unfolding that also carries potentially grave consequences for global finance and development.

Some of the world’s largest financial institutions have been reporting a steep drop in the services and transactions that they process for smaller local and regional banks around the world.

The severing of these ties poses a number of risks to the growth and development of businesses in affected regions — particularly island states in the Caribbean who rely heavily on international banking — and undermines the type of financial inclusion that regional development banks work to promote.Lifeblood servicesmately centers on a service that is considered vital for global banking.

“Correspondent banking services are essential to enabling companies and individuals to transact internationally and make cross-border payments,” according to a World Bank report.