U.S.-Mexico Correspondent Banking
A Correspondent Banking Explainer:
How regulations impact GDP and job growth on both sides of the U.S.-Mexico border.
Correspondent banking is a vital component of international banking activity for both commercial and retail customers. Aggressive overregulation of the correspondent banking market via outdated Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) standards has led to the consolidation and, ultimately, the deterioration of this market, resulting in fewer choices and higher costs for consumers and the elimination of large swaths of legitimate economic activity.
The Texas Association of Business has collaborated with Dr. Robert J. Shapiro, former Under Secretary of Commerce and chief economic advisor in the Clinton administration, to take a fresh look at the correspondent banking relationship between the U.S. and Mexico and the impacts it has on both nations' commercial and geopolitical bilateral relationship.
Download the report authored by Dr. Shapiro on the importance of regulatory reform to the U.S.-Mexico correspondent banking relationship.
Correspondent Banking and its Role in the Economy
Correspondent banking is the cross-border transaction process that facilitates the easy exchange of US dollars for local currency, and vice versa. Every day, correspondent banks facilitate a number of transactions between the U.S. and Mexico such as American tourists using U.S. dollars in Mexico, and Mexicans in the U.S. sending need remittances to their families in Mexico.
Often viewed with suspicion among lawmakers and regulators for alleged transparency and money laundering concerns, correspondent banking is an essential service in conducting international commerce and has both direct and indirect impacts on financial inclusion. Over the last 20 years, critical policies such as the Bank Secrecy Act and anti-money-laundering regulations have created and ensured a safe and transparent correspondent banking environment, dramatically reducing risk for participating financial institutions and facilitating the transfer of funds thousands of times a day to the tune of more than 7 billion dollars a year.
State of Correspondent Banking in Mexico
The correspondent banking relationship between the U.S. and Mexico has deteriorated over the past two decades due to aggressive overregulation and supervision leading to account “de-risking.” In Mexico, since 2016 the market has declined from 20 to, now, two U.S. participants. This process led to elimination of large swaths of legitimate economic activity beneficial to the commercial and geopolitical bilateral relationship between the U.S. and Mexico.
Given Mexico's role as a hub for the global financial system, the tendency for major banks to de-risk and the overall decline of correspondent banking in the U.S. is a serious concern not only for global financial markets and trade, but for the broader economic relationship between the U.S. and Mexico.
This is especially true considering that Mexico is the U.S.’s No. 1 trading and commercial partner, just recently surpassing both Canada and China. As of May 2021, U.S.-Mexico trade totaled $262.8 billion, comprising 14.7% of total U.S. trade. This relationship is expected to see continued growth as relations between the U.S. and China remain tense.
Improving the Correspondent Banking Relationship between the U.S. and Mexico
In order to preserve the bilateral economic relationship with Mexico, the primary trading and commercial partner to the U.S., correspondent banking guidelines must be adjusted to reflect the reduced risk profiles leading Mexican financial institutions have today.
It's important that Washington and financial regulators focus on implementing reform on both sides of the border under which joint regulations can be developed and managed.
Read the report by Dr. Shapiro on the importance of regulatory reform to the U.S.-Mexico correspondent banking relationship.