Prospects for blockchain-based settlement frameworks as a resolution to the threat of de-risking to Caribbean financial systems

Abstract

Caribbean countries have been seriously impacted by the trend toward “de-risking” in the global financial system, and this is damaging to their economic security and the ability of Caribbean businesses to innovate. De-risking is the name given to the tendency of banking institutions to turn away from working relationships and lines of business for which the cost of regulatory compliance—and the risk of non-compliance— is deemed to be too high in comparison to the returns. This is a phenomenon that is affecting developing economies around the world, but the small and vulnerable economies of the Caribbean have been hardest hit.

For example, recent years have seen a trend in which banks in major economies are severing their correspondent relationships with banks in the Caribbean, having determined that the profitability of these operations is outweighed by the cost of managing associated risks. Banks in the Caribbean have been left struggling to recover from this abandonment by many of their former business partners, having been reliant on these correspondent banking relationships as a means of access to global financial networks (Boyse and Kendall 2016).

Under correspondent banking schemes, a “correspondent bank” – typically a banking institution with a presence in a major developed economy, such as the United States or European Union – holds an account on behalf of a bank located in a smaller, less developed economy. Many Caribbean banks use these correspondent accounts to provide their customers with international money transfer and foreign exchange services. However, institutional and regulatory factors have driven correspondent banks to reduce their exposure to risk. Particular areas of concern include issues surrounding anti-money laundering and combating the financing of terrorism (AML/CFT) and the need to ensure compliance with international trade sanctions. The costs associated with the high level of customer due diligence required to manage such risks are, in many cases, not justified by the low profit margins associated with correspondent banking services. As a result, many Caribbean banks are finding that the correspondent banking relationships that they have relied on in the past are being cut off.