When Money Can No Longer Travel

AuthorAndreas Adriano

When Money Can No Longer Travel Finance & Development, June 2017, Vol. 54, No. 2

Andreas Adriano

Correspondent banking relationships, which facilitate global trade and economic activity, have been under pressure in some countries

Angola, the third-largest economy in Africa, relies on imports to keep its economy running. It is a heavyweight exporter of oil, diamonds, and iron ore, but it imports food, medicine, construction materials, vehicles and parts, and capital goods. Many sectors dependent on imports, like construction, are at risk of coming to a halt because importers often find it more difficult to pay their international suppliers. Why? Because Angola has undergone derisking—a term that describes a complex, multifaceted problem affecting mostly, but not only, small developing economies whose connections to the global financial network have been under threat.

Imagine if international airlines, like Air France, American, Lufthansa, and United, suddenly stopped serving a country with no national airline that relies on these companies as its link with the rest of the world. The people and the economy would suffer: airlines that still served the country would raise their fares, making it costlier to import and export and for people to travel. Fewer direct flights and higher prices would discourage tourism.

Money travels around the world in more or less the same way as people, and through some of the same city hubs. Someone traveling from Luanda, Angola, to San José, Costa Rica, could fly to Europe, then to a US airport, then to San José (or to São Paulo, then Panama City, then San José). A wire transfer between two countries also hops around the globe and makes several connections, traveling usually within the networks of large global banks—Bank of America Merrill Lynch, Citibank, Deutsche Bank, Standard Chartered, and many others.

Derisking happens when global banks stop providing international payment services such as wire transfers, credit card settlements, and even hard foreign currency to a country’s local banks. In the world of payment systems, provision of these services is generically referred to as correspondent banking. Without it, a bank—and therefore its clients, i.e., people and companies in that country—loses access to the global financial grid.

It’s not hard to see the consequences for a developing country in a highly integrated global economy if money cannot travel. Just imagine a country heavily dependent on tourism, as in the Caribbean, in which hotels all of a sudden are unable to process guests’ credit card payments or airlines can’t pay for fuel. In fact, Caribbean countries have been among the most affected by loss of correspondent banking relationships.

According to a survey earlier this year by the Caribbean Association of Banks, 21 of 23 banks in 12 countries have lost at least one correspondent banking relationship. Eight were operating with a single provider. Most are able to find alternative arrangements. Countries in Africa, eastern Europe, the...

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