The loss of correspondent banking relationships in developing countries as major banks try to limit risk exposures could marginalize small economies and cause "systemic" disruptions to their financial systems, the head of the International Monetary Fund said on Monday.
IMF Managing Director Christine Lagarde said in prepared remarks at the New York Federal Reserve that regulators in both major financial center countries and small countries need to do more to help banks maintain these relationships.
"I am concerned that all is not well in this world of small countries with small financial systems. In fact there is a risk that they become more marginalized."
She said these already have hit a number of Caribbean countries, where as of May, at least 16 banks in five countries have lost all or some of their correspondent banking relationships.
Reuters reported last week that the problem is particularly acute in Belize.
Lagarde said such countries are especially vulnerable, often depend on remittances from workers abroad, and have minimal access to financial services under the best of circumstances.
"Even if the global implications of these disruptions are not visible so far, they can be come systemic if left unaddressed," she said.
Lagarde acknowledged that some of the pull-back by major global banks is a reaction to increased capital requirements prompted by the 2008-2009 financial crisis, which has made lower-return businesses such as correspondent banking less attractive.
Tougher compliance rules to combat money laundering and financing of terrorism also have been a factor, but she noted that IMF researchers found there is considerable uncertainty among many banks as to their regulatory obligations in these areas.
"Since these are the very issues where regulators have tried to provide clarity, this suggests that both sides still have some work to do to rach a better understanding," Lagarde said.
Lagarde also said the affected countries need to upgrade their regulatory and supervisory frameworks to enhance compliance with international standards, especially in the area of anti-money laundering and anti-terrorism finance compliance.