WASHINGTON/NEW YORK (Reuters) - 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, speaking at the Federal Reserve Bank of New York, said 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," she said. "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.
In an apparent nod to the cyber theft in February of $81 million from Bangladesh Bank's account at the New York Fed, which raised questions over correspondent-banking security, Lagarde said such countries could also "be the weak link that many of you are concerned about when it comes to safety and security, to making sure that flows are legitimate."
She acknowledged that some of the pull-back by major global banks is a reaction to increased capital requirements prompted by the 2008-09 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 reach a better understanding," Lagarde 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, she added.
(Reporting by David Lawder and Jonathan Spicer; editing by Chizu Nomiyama)