Cayman banks must adapt to survive de-risking

The banking sector in Cayman will have to accept new ways of working, including sharing costs and services, in order to survive in the current climate of de-risking, according to US industry consultants that visited the jurisdiction recently. “There has been a paradigm shift in international banking and payments,” said Kobi Dorenbush, former chief executive of Caledonian. “This is not just a trend. It is the new normal. We won’t solve these new challenges by continuing with the same processes that we developed decades ago.”


The consultants from the Promontory Financial Group took part in a seminar, organised by Dorenbusg and hosted by law firm Harney’s, aimed at better preparing Cayman banks for the implications of de-risking by US financial institutions and to see what measures can be taken to avoid being potentially shut off from the international financial system, with small banks in the Caribbean seen as particularly vulnerable.


All members of the Cayman Islands Bankers Association were invited to the session, which spelled out the difficulties some of the banks here are facing, as revenues for smaller banks in Cayman have fallen at the same time as the risk appetite among correspondent banks.


“One correspondent bank we know got rid of all its relationships that contributed less than $50,000 per year in revenue,” said Pierre de Saint Phalle, a managing director in Promontory Financial Group’s New York Office.


“Correspondent banking is no longer being seen as a viable loss leading activity,” added Sheryl Kennedy, who heads Promontory’s Toronto office.


Promontory’s de Saint Phalle said that while correspondent banks generally are revisiting their respondent relationships due to the increased focus globally by regulators on issues like AML, anti-terrorist financing, sanctions and tax evasion, he said the clearing banks also need to have a greater understanding of the regulatory environment that the respondent banks operate in.


“Every correspondent bank has access to an AML/CFT risk register of every country prepared by the US State Department that they use to help measure the strengths of the AML/CFT supervisory processes in these countries as well as to confirm their own perceptions of the risks,” he said.


A recent report by the World Bank and Bank for International Settlements said that banks in the Caribbean ranked highly in terms of being at risk of losing their correspondent banking relationships. The report, Withdrawal from Correspondent Banking: Where, Why and What to Do About It (November 2015), found that roughly half the banking authorities surveyed and slightly more local/regional banks said they were experiencing a decline in correspondent banking relationships. For large international banks the figures were significantly higher at 75%, the report said, with the Caribbean cited as the region most severely affected.


US perceptions of banks in the Caribbean have also been heavily influenced by comments from both Congress and the State Department, which has only served to compound the negative view of banks in Cayman, among their correspondents. The September 2012 US Senate Caucus on International Narcotics Control named the Cayman Islands as one of eight Caribbean countries designated as jurisdictions of primary concern for money laundering activities.


“Although people in Cayman will disagree with this, Cayman still has to live with the perception that reports like this cause,” Dorenbush said. “That perception permeates through pop-culture and into the international finance industry.”


Highlighting Cayman’s key role in the global banking and financial markets, Harney’s Managing Partner Marco Martins said the jurisdiction’s solid regulatory and legal framework, plus its world class expertise contributed to the “fight for stability and transparency, and against all forms of illegal and illegitimate uses of financial and banking infrastructure”.


He added, “In order for it to continue to do its part in creating a stable and trustworthy global financial system, Cayman entities must continue to access the global banking system.”


Source: CNS Business

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