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Financial Services Law Insights and Observations

IMF Releases Policy Paper Addressing Recent Trends and Considerations in Correspondent Banking Relationships

Federal Issues Anti-Money Laundering Combating the Financing of Terrorism Correspondent Banking International

Federal Issues

On April 21, the International Monetary Fund (the Fund) announced the release of its policy paper addressing recent trends in correspondent banking relationships (CBRs). According to the Fund, CBRs are facing pressure in some countries as cross-border flows are “concentrated through fewer CBRs or maintained through alternative arrangements.” Decisions made by global banks to terminate CBRs often result from a lack of confidence in the respondent bank’s ability to manage risk. Notably, recent changes in regulatory and enforcement requirements—addressing economic and trade sanctions, Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) guidelines, and tax transparency standards—have contributed to this problem. The Fund notes that these “financial fragilities” resulting from the terminations have the potential to increase financial services costs and negatively affect bank ratings—thus creating long-term effects on growth. The paper highlights the Fund’s plan to address withdrawal concerns and the resulting implications, including:

  • establishing measures to enhance respondent banks’ capacity for risk management;
  • strengthening and effectively implementing regulatory and supervisory frameworks, particularly with respect to AML/CFT;
  • improving communication between correspondent and respondent banks;
  • removing impediments to information sharing between correspondent and respondent banks; and
  • understanding the “feasibility of temporary mechanisms, including public-backed vehicles, to provide payment clearing services” in the event all CBRs are withdrawn from a country.

The Fund also notes collaboration efforts with the Financial Stability Board, World Bank, G20, Financial Action Task Force, Arab Monetary Fund, and the Committee on Payments and Market Infrastructures, among others, to “ensure financial stability and promote financial inclusion.”

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