This column by TAB CEO Glenn Hamer was originally published by the Austin American-Statesman on April 28, 2022. Photo by Fotolia.
Lack of financial stability and economic opportunity are the root causes of migration from Central America to the United States. People come here for economic opportunity, which is afforded by a smarter, lighter regulatory environment. Overregulation stifles positive economic activity. One way to ease pressure is by modernizing banking regulations restricting the U.S.-Mexico correspondent banking system.
Any time an American tourist tips a Mexican hospitality worker in U.S. dollars, that worker sends cash (remittances) back to family in Mexico. Or when someone returns home to Mexico after being paid in U.S. dollars, they rely on correspondent banking to convert those dollars into local currency. According to the Mexican central bank, approximately $6.3 billion in hard U.S. currency was transferred in 2021 – half from tourism, and the rest from payments to Mexican workers employed near the U.S.-Mexico border, remittances carried back to Mexico by visiting migrants, and criminal proceeds seized by the Mexican government. Unfortunately, U.S. banks have been disincentivized to engage in correspondent banking. Roughly 20 years ago, regulations were less rigorous. To better understand where money was coming and going as it moved from country to country, the U.S. over-corrected. The sweeping, new policies were needed at that time, but were never later adjusted to reflect Mexico’s revised banking standards – which are now on par with U.S. regulations. As a result, just in the last six years, the U.S.-Mexico correspondent banking market has been decimated, experiencing a 92% reduction in participating institutions from 40 to just two.
The significant constriction of the correspondent banking market has made it increasingly difficult and more expensive for Mexicans to exchange U.S. dollars for local currency – economic and social burdens that directly contribute to the financial and economic instability that drive migration flows.
Correspondent banking also has an outsized impact on gross domestic product (GDP) growth, foreign direct investment (FDI), and potential job creation. That’s according to an analysis commissioned by the Texas Association of Business, authored by Dr. Robert J. Shapiro, a former under secretary of commerce for economic affairs and economic policy advisor to the Clinton and Obama administrations.
Dr. Shapiro’s analysis sheds much-needed light on several economic metrics. For example, a constricted correspondent banking market has resulted in a nearly $40 billion hit to U.S. GDP over the past six years, along with 240,000 missing U.S. jobs resulting from a $3.3 billion decline in foreign direct investment from Mexico to the U.S. On the Mexican side, this constricted market drove $74.3 billion in fewer exports from Mexico to the United States and a reduction in the estimated stock of U.S. foreign direct investment in Mexico by $1.4 billion.
This new study finds a meaningful link between U.S. financial regulation on correspondent banking and poorer economic GDP, FDI, and jobs metrics on both sides of the border, which today neither country can afford. Further, a substantially reduced number of banks in the remittance and correspondent banking business means ultimately one thing: higher costs and fewer options for those generally least able to bear those costs, especially when those individuals have, at best, marginal access to secure financial institutions.
It’s time for the U.S. Treasury and other regulatory bodies to acknowledge the successful efforts of Mexican financial institutions to reduce risk across their correspondent business lines. Telling banks that correspondent banking is safe will go a long way to ease two decades of fear of undue oversight, provide critical options and lower costs to those who have historically been excluded from the financial system, and modernize the U.S. framework for a market that makes billions of transactions per year possible for the benefit of citizens on both sides of the U.S.-Mexico border.