There has been much talk about de-risking in economic circles recently, centering especially around the impact it will have on Jamaica and the wider Caribbean region. The consensus from these groups seems to be that if left unchecked, the practice of de-risking can negatively affect the small regions and businesses globally.
Key points on de-risking
Here are a few key facts you should know:
1. According to The World Bank, de-risking is “The phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk.” (Find out more about de-risking in our article explaining what it is and why banks do it.)
2. De-risking cemented itself as an ’emerging trend’ in 2016 when it became clear that large banks and financial institutions were becoming increasingly unwilling to venture into relationships with certain categories of customers that they perceived to be ‘high-risk’, whether they were companies, persons, whole countries, or other banks.
3. As members of one of the smaller regions of the world, Jamaican and Caribbean stakeholders have – individually and collectively – spoken out about de-risking because this practice could adversely affect their businesses, reputations, and livelihoods.
4. The main point of concern for Jamaica and the Caribbean region (as at September 2016) is the loss of correspondent banking relationships. In order to perform certain kinds of economic and financial transactions for their customers, small banks and states often rely on correspondent banks (usually large, international banks from Canada, Europe and the United States) for access to the international financial system. Lately, these correspondent banking relationships have been jeopardised by de-risking.
De-risking in the news
Here’s what different organisations have been saying in the news about de-risking:
Christine Lagarde, managing director of the International Monetary Fund, has emphasised the importance of correspondent banking relationships to small states:
Lagarde likened correspondent banking to “the blood that delivers nutrients to different parts of the body” and that “it is core to the business of over 3,700 banking groups in 200 countries”. (De-Risking Could Affect Caribbean People’s Livelihood, The Gleaner website)
Jamaica’s Finance Minister, Audley Shaw, has said the Caribbean is perhaps the most gravely affected region:
“A recent World Bank survey and study revealed that the Caribbean appeared to be the region most severely affected by the de-risking strategy,” the Minister of Finance and the Public Service, the Hon Audley Shaw said during his address at the IMF/World Bank Annual meeting held in Washington. (Oct, 2016) (De-Risking a Worrying Threat to Sustainable Growth in the Caribbean, JIS website)
The Caribbean Association of Banks has expressed concern that de-risking may render the region ‘unbankable’:
… the loss of correspondent banking relationships could render the Caribbean region unbankable and ultimately destabilise all sectors of the economies.
Correspondent banking relationships are critical for enabling key economic and financial transactions such as remittances, foreign direct investments and international trade in goods and services, which constitute some of the key drivers for sustaining the Caribbean’s growth and development. (De-Risking Could Affect Caribbean People’s Livelihood, The Gleaner website)
Jamaica’s Prime Minister Andrew Holness has said de-risking will cause ‘serious obstacles’ to investments in Jamaica:
“This trend hinders our participation in the global financial system and in international trade. This, in turn, creates serious obstacles in our efforts towards promoting investment,” Holness said.
He pointed out that trade represents approximately 70 per cent of the Jamaican economy and, as such, de-risking measures threaten Jamaica’s integration and economic viability. (De-risking Must Be Addressed Urgently, Jamaica Observer website)
Additionally, Jamaica’s Finance Minister Audley Shaw foresees challenges to the country’s gaming industry:
“We have to go cautiously on the issue of de-risking because in Jamaica’s case, we already have an informal economy that has established itself to be somewhere in the region of about 40 per cent,” he [Shaw] said. (Bank De-Risking Hits Gaming Companies, The Gleaner website)
CARICOM representative on de-risking and Prime Minister of Antigua and Barbuda, Gaston Browne, met with the heads of the Caribbean Development Bank (CDB) and the Jamaica National Building Society (JNBS) to discuss de-risking:
De-risking of correspondent banking services is an existential threat facing the Caribbean region which has the potential to decimate our living standards,” Prime Minister Browne said following the meeting in St John’s, Antigua. Prime Minister of Jamaica, Andrew Holness’ shares a similar focus, recently describing de-risking, at a press conference in Kingston to discuss his government’s Economic Growth Council, as a “clear and present danger”. (CARICOM Deepens Regional Partnerships to Address De-risking, LOOP News website)
Columnist Earl Jarrett sees de-risking as perhaps the fuel needed to drive Caribbean financial cooperation, innovation and independence:
Is the increasing approach by correspondent banks to de-risk financial institutions in select regions around the world, the Caribbean in particular, to be viewed as one of the final steps towards completing the independence of Caribbean states from Europe and the rest of the world? (De-Risking: A Regional Avenue Towards Financial Independence, The Gleaner website)
For even more in-depth information, see: