The International Monetary Fund (IMF) has leveled a frank and sober appraisal at local commercial banks by warning that they risk further loss of correspondent banking relations (CBR) if they do not consolidate their business.
According to the Deputy Managing Director of the IMF, Zhang Tao, “consolidation” is the only way to achieve an “economy of scale” large enough to make correspondent banking profitable for overseas banks who provide the service.
“We need to determine whether small Caribbean banks can bundle transactions to create the scale required for global banks to maintain banking services. As small states, the Caribbean countries are likely to offer relatively small volumes of CBR transactions,” Zhang said.
“This makes it difficult for banks to generate economies of scale and therefore higher profits from CBR activity. One could explore if there is scope for some consolidation of banking systems in the region. If there is … can it be done through public or private initiatives or some combination of the two?”
A correspondent bank provides services on behalf of another bank, facilitating wire transfers and various transactions and are used by domestic banks to service transactions that either originates or are completed in foreign countries.