Financial sector reform to avert correspondent banking crisis – Finance Minister

Georgetown, GINA, Tuesday, November 29, 2016

Several Financial Sector reforms were highlighted during the 2017 National Budget presentation to the National Assembly on Monday by Finance Minister, Winston Jordan. The Minister explained to the House that like other Caribbean economies, Guyana faces a potentially damaging correspondent banking crisis.

It was further explained that local banks and financial institutions of small Caribbean economies rely heavily on correspondent banking relationships with global banks to connect with the international financial network. These relationships, Minister Jordan said, allow local residents to receive remittances from abroad, tourists to access cash from their home accounts, “and facilitate the transfer of funds needed to support trade and investment in our region.”

Winston Jordan

Recently, Minister Jordan noted concerns about meeting new, stricter rules related to Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) which has led correspondent banks to terminate their relationships with their local partners, a practice termed “de-risking”.

De-risking refers to financial institutions’ closing the accounts of clients perceived as high risk for money laundering or terrorist financing abuse, namely money service businesses, nonprofit organisations, correspondent banks, and foreign embassies.

The Minister explained  to the National Assembly during the budget presentation, that foreign-owned  banks  operating  in  Guyana  have  not  been  subject  to de-risking. Locally owned banks have been severely affected by this, “losing in the aggregate, approximately 37 percent of correspondent relationships by end-June 2016. Thus far, only one bank has been able to establish new correspondent relationships to cover about 75 percent of those that were lost.”

If this trend continues, Jordan said financial transaction services may become costlier and more limited, and legitimate transactions may go underground, encouraging the use of cash and increasing other forms of informality at a time when attempts are being made to deepen financial inclusion.

The Finance Minister stated that Guyana, in partnership with other Caribbean economies and international institutions such as the Financial Stability Board (FSB), International Monetary Fund (IMF), and World Bank, are working to address the threat posed by de-risking, through both advocacy and addressing the perceived risks that lead international banks to sever correspondent banking relationships.

These actions, have resulted in Guyana’s enhanced compliance with the implementation of recommendations by the Financial Action Task Force (FATF), and the FSB, the Minister said.

Government has moved to enhance its supervisory framework; hence Minister Jordan stated that the Bank of Guyana (BOG) conducted a review of its Risk-Based Supervision framework, and drafted updates and a procedural manual. This enhanced document, the Finance Minister said, will be reviewed by competent authorities prior to publication and implementation.

“Additionally, a comprehensive review of all existing supervision guidelines is slated for 2017 and, in this regard, technical assistance is being sought from our multilateral partners.”

The Minister spoke of preliminary results from the IMF and the World Bank Financial Sector Assessment Programme (FSAP) of Guyana, conducted from May 10 – 24, 2016. These, he said, indicated the need for legislative amendments to the Financial Institutions’ Act 1995 in the following areas; The Bank’s resolution powers for failing institutions;  Sharing of information; Licenced Financial Institutions’ credit exposure limits; Prompt Corrective Action requirements; Protection of Bank’s officers and agents; Identification of ultimate beneficial shareholders and significant ownership interest; Definition of related party; Consolidated supervision and consolidated reporting; Implementing administrative penalties and sanctioning policies; and Establishing  the  responsibility  of  Directors  for  safety  and  soundness  of financial institutions.

The Minister gave Government’s commitments to ensure that the necessary amendments to the Financial Institutions’ Act 1995 “are effected in an efficient and timely manner.” He added that during the third quarter of 2016, a diagnostic mission was conducted to identify gaps and make appropriate recommendations to develop a suitable framework for financial consumer protection.

In 2016, the BOG made improvements to its stress testing toolkit, based on recommendations from the World Bank Financial Sector Reform and Strengthening Initiative and the FSAP team. In 2017, the Finance Minister emphasised that the BOG will prepare a guideline on stress testing for use by the banking system, develop a macroeconomic stress test model for the economy of Guyana, “and develop a model for the assessment of interest rate risks.”

To bring Guyana in line with international best standards for capital adequacy of banks, the BOG has commenced preparation for the implementation of Basel II. Next year, Minister Jordan sated that the Bank will issue industry guidelines for Pillar I of the Basel II standards, which relate to minimum capital requirements. The guidelines will cover credit, market and operational risk.

The   BOG, the Minister revealed, is considering the establishment of Deposit Insurance in Guyana. Deposit Insurance legislation, he explained, will protect the funds of banking customers, in keeping with international norms.

The systemic failures of CLICO reinforced the need for enhanced regulation in the insurance sector. The new Insurance Act, which was passed in Parliament earlier this year, is awaiting a commencement date, the Minister assured.

In 2016, a policy decision was taken to bring the supervision and regulation of credit unions under the purview of the BOG. In 2017, the Bank   will   work   towards   increasing   credit   unions’   familiarity   with International Financial Reporting Standards, and improving internal control systems in a way that is appropriate for their complex governance procedures.

The Finance Ministry will move to institute ‘Agency  Banking’,  a  form  of  banking  in  which financial institutions’ representatives, carry  out  some  financial  services.

To continue the enhancement of the efficiency of the financial system, the BOG, with assistance of the World Bank will undertake a comprehensive and strategic modernisation of Guyana’s National Payment System, to advance the use of electronic payments.

This move, the Finance Minister stressed, “could save the Government up to $266 million (0.04 percent of GDP), annually, by switching from paper-based payment mechanisms to electronic payments, as well as create substantial savings for consumers and businesses.”