De-risking: the hidden issue hindering SDG progress and threatening survival of small island states

Correspondent banking relationships connect local economies with the international financial system and are essential to making payments across borders. They underpin international trade and remittances – as well as the financing of humanitarian work. Over the last decade, global banks have been limiting correspondent banking relationships with local banks in emerging and developing economies – a practice referred to as “de-risking.” The drivers of this trend are multifaceted and complex, involving a web of commercial, regulatory and legal issues.

The ICC-hosted dialogue took place in New York City, ahead of the United Nations General Assembly’s high-level meeting on financing for development – with discussions highlighting the unintended but broad impacts of de-risking that now pose an existential threat to small island states in the Caribbean and Pacific, and developing countries within Africa and Latin America.

In opening the session, ICC Secretary General John W.H Denton AO said:

“The decline in correspondent banking services drives up the cost of remittances – a critical lifeline to development for many nations; it puts crucial trade finance out of reach for importers; and it threatens to cut off whole economies from the international financial system.”

In keynote remarks, Commonwealth Secretary General Patricia Scotland added:

“There is now a question as to whether small states can survive, at all. Because if they are going to be subject to the rigors, the exigencies of climate change – that existential threat – and have no correspondent banking, what is the future?”

Resetting the international agenda

Given the scale of the challenge, the dialogue emphasised the need for a new approach to tackle continued de-risking trends. Participants – including heads of government and senior corporate executives – highlighted the need for greater political focus on strengthening correspondent banking networks and stronger regulatory cooperation to address financial crime risks without impairing financial inclusion.

Speakers also noted the potential to make structural changes to local banking markets to enable access to correspondent services and the growing role of financial technology in reducing transaction costs.

Mr Denton said:

“We are not here to admire the problem: we want to help shape a roadmap to deliver an outcome and to co-create a solution to the problem. The threat that the decline in correspondent banking poses, links to ICC’s purpose to enable peace, prosperity and opportunity for all … which is why this issue is so important to us.”

The session will mark a concerted push by ICC – as the institutional representative of 45 million businesses – to address this issue both by championing policy change and by enabling the development and deployment of practical solutions in affected states.

What they said – highlights from the dialogue

Gaston Browne, Prime Minister of Antigua and Barbuda:

“The perception of high risk is flawed. The small size of the Caribbean market, the low transaction value and the stringent know-your-customer reporting requirements make it exceedingly difficult to launder money or to fund terrorism utilising our banking system. It is significantly easier to open a bank account here in the United States than to open one in the Caribbean.”

Tuilaepa Aiono Sailele Malielegaoi, Prime Minister of Samoa:

“Remittances are one of the main sources of foreign exchanges and are a lifeline to most small states, accounting for 24% of our GDP.”

Timothy N. J. Antoine, Governor of the Eastern Caribbean Central Bank said:

“Home grown digital solutions have emerged, providing a range of opportunities for accessing funds, and the development of financial infrastructures can ensure an enabling environment to support growth. … The enhancing of digital financial services can produce cross cutting benefits, if done right.”

Unity Dow, Minister of Foreign Affairs and International Cooperation of the Republic of Botswana:

“Rather than including more people in the banking system, the unintended consequences of de-risking is actually leading people to walk away from banking.”