IMF Lagarde on the Importance of Big and Small Banking

IMF Managing Director Christine Lagarde delivered a speech at the Federal Reserve in New York City on July 18. The speech was titled “Relations in Banking – Making it Work for Everyone.”

The topic of the speech concerned Correspondent Banking as it involved banks and their clients in developing countries, small island economies and small financial systems.

Currently there is a trend among large banks to downsize their correspondent banking relationships. The reasons for this are generally two:

• Low profitability
• Some relationships damaging to their risk profiles

Lagarde explained how banks in Africa, the Caribbean, Central Asia and the Pacific are at risk of being cut off from the global financial network. She gave examples that included banks in the Caribbean, Liberia and Samoa. Not only small economies are at risk, but countries like Mexico and the Philippines. Many of these countries count on overseas remittances to make up a significant part of GDP.

The IMF sees a need for the banks to work together to reduce the cost of Anti Money Laundering–Combating the Financing of Terrorism (AML/CFT) compliance. Countries need to upgrade their compliance standards in this area. And regulators must regulate so that the regulated can understand what is required. Lagarde stresses that while there are current concerns, a business case can be made for banks continuing their operations in small countries. Should they withdraw, other systems both legal and not legal may well emerge to fill the vacuum.

Lagarde concluded “all actors have a part to play” in solving this problem, and that there is much at stake for large and small players.

Full text of  Lagarde speech at IMF

Photo: IMF via flickr