Report recently authored by Shapiro notes the detrimental impact of ‘de-risking’ policies that constrain the banking market and harm consumers on both sides of the U.S.-Mexico border
MEXICO CITY – Wednesday, September 28, 2022 – The Texas Association of Business (TAB) today announced that Dr. Robert J. Shapiro, author of the recent TAB-sponsored econometric analysis on the harmful economic impacts of U.S. de-risking policies on the correspondent-banking relationship between the United States and Mexico, testified in front of the Mexican Senate to elevate the issue of correspondent banking to the highest levels of the Mexican legislature.
Dr. Shapiro’s groundbreaking report, released earlier this year, shed new light on the adverse, unintended economic and social effects of current U.S. anti-money laundering (AML) and combatting financial terror (CFT) regulations on the cross-border correspondent banking relationship between the U.S. and Mexico. Correspondent banking is the provision of services by one financial institution to another financial institution, including affiliates, in different countries. A correspondent bank acts as an intermediary or agent, facilitating banking services on behalf of another bank and its customers.
Dr. Shapiro’s testimony before Senator Alejandro Armenta, president of the Mexican Senate, and other key officials echo the findings of his recent report, which found that misplaced emphasis of U.S. AML/CFT regulations and enforcement on correspondent banking, with particular attention to transfers between the United States and Mexico, contributed to a cumulative U.S. GDP loss of $38.3 billion, approximately $5.5 billion per year, between 2012 and 2018.
Novel econometric analysis applied by Dr. Shapiro and his team documents the following economic effects of the current misplaced regulation of the correspondent banking market:
● The constriction of the correspondent banking market reduced Mexican FDI flows to the United States by an estimated $477 million per-year from 2012 to 2018 and reduced the estimated stock of FDI in the United States over those years by nearly $3.3 billion.
● These same declines in correspondent banking are associated with an estimated $1.4 billion reduction in the U.S. stock of FDI in Mexico.
● These effects depressed U.S. employment growth by an estimated 285,100 positions from 2012 to 2018, or an average of 40,730 jobs per year.
The analysis also found that:
● Over the past decade, the Mexican government and banking institutions have established modern systems to track cross-border transactions and comply with AML/CFT standards and protocols, and the IMF and World Bank have commended Mexico for these developments.
● Despite the reduced risk in engaging with Mexican financial institutions in cross-border transactions, concerns about misplaced regulatory scrutiny have sharply contracted the correspondent banking marketplace, driving a 92% reduction in participating U.S. institutions from 20 to just two since 2016.
● The decline in correspondent banking relationships associated with misplaced AML/CFT efforts reduced Mexican exports to the United States by $74.3 billion over the decade from 2011 to 2021 compared to what would have been expected without the changes in correspondent banking.
● The reduction in Mexican exports associated with the reduction in correspondent banking dampened U.S. employment growth by an estimated 113,830 jobs from 2011 to 2021
“Our analysis shows that the reductions in cross-border correspondent banking relationships and values associated with AML/CFT efforts have resulted in slower growth in foreign direct investment and trade between the two countries than would have been expected but for the AML/CFT focus on correspondent banking,” said Dr. Robert J. Shapiro, author of the recent report.
“Current U.S. policy towards Mexico on de-risking disregards more than a decade of documented Mexican government and banking institution steps to sharply reduce the risk of money launderers taking advantage of the nation’s banks and correspondent banking arrangements,” he added. “The result instead has substantially reduced the number of banks in the remittance business, in turn increasing the burden and cost of sending and receiving remitted funds and adversely affecting those generally least able to bear those associated burdens and costs, including lower-income and often unbanked individuals with marginal access to financial institutions.”
TAB CEO Glenn Hamer noted that the paper makes crystal clear that the correspondent banking marketplace needs critical updates and unambiguous guidance that reflects the reality of the current environment, stressing that competitive and healthy correspondent banking relationships are vital to the economic wellbeing of diverse Texas families and the cross-border businesses upon which the Lone Star State relies.
“Dr. Shapiro’s groundbreaking work illustrates the importance of repairing current AML/CFT regulations, especially because we know financial and economic instability is a key driver of migration flows,” said TAB CEO Glenn Hamer said. “U.S. institutions need to be told it’s safe to engage in the correspondent banking marketplace. The longer the status quo is maintained, the bigger the ongoing impact will be to GDP, FDI, and jobs on both sides of the border.”
Dr. Shapiro’s testimony before the Mexican Senate casts a spotlight on the issue before a critical group of stakeholders, as solutions to increase correspondent banking relationships between the U.S. and Mexico may require collaboration between regulators of both countries. Sen. Armenta acknowledged the negative impact outdated de-risking policies have had on Mexico, and called on Mexican regulators to work with their counterparts in the U.S. to rectify the issue.
“We thank Dr. Shapiro for coming to the Senate to provide a critical bilateral perspective on the issue of correspondent banking and de-risking,” said Senator Alejandro Armenta, President of the Mexican Senate. “It is very important to hear directly from Dr. Shapiro about the findings of his research in order to fully understand the harmful consequences of misplaced regulation on the bilateral economic relationship between the US and Mexico, which are detailed in his powerful report. This knowledge will be key to developing and supporting an ongoing and mutually beneficial bilateral dialogue to enhance the future economic security of both countries.”
The full econometric report can be found at: https://www.txbiz.org/correspondentbanking.
TAB is the Texas State Chamber of Commerce, representing companies of every size and industry. The Association’s purpose is to champion the best business climate in the world, unleashing the power of free enterprise to enhance lives for generations. Follow TAB on Facebook, Twitter, and LinkedIn.
Dr. Robert J. Shapiro is an economic advisor and chairman of Washington, D.C.-based economic analysis firm Sonecon, LLC. Dr. Shapiro has advised Presidents Bill Clinton and Barack Obama, Vice President Albert Gore, Jr., British Prime Minister Tony Blair and Foreign Secretary David Miliband, Secretary of State Hillary Clinton, Treasury Secretaries Robert Rubin and Timothy Geithner, and other senior members of the Clinton, Obama, and Biden administrations, as well as the U.S. Congress.