Editorial | Move quickly on settlements regime

In remarks little noticed outside of Europe, Aurore Lalucq, the chair of the European Parliament’s economic and monetary affairs committee, warned last week of the dangers of the European Union’s (EU) significant reliance on America’s payments clearance systems.

“...That is where our fragility lies today,” said Ms Lalucq, while expressing concern that the European Commission was paying too little attention to the issue. “Almost all of our payment systems today are American.”

That, Ms Lalucq said, left the EU exposed to potential political pressure and disruption of financial systems any time Donald Trump, the US president, is peeved with Europe.

“Donald Trump can cut them (payment systems) off overnight,” she said. “He has already done so (in other situations).”

Businesses of all sizes in the EU, Ms Lalucq said, were fearful of these possibilities.

In that regard, she called for the Commission’s president, Ursula von der Leyen, to urgently begin discussions “to create an Airbus of payment systems”.

“We can’t say we weren’t warned,” Lalucq said, adding that the creation of a European clearing arrangement would be inexpensive, with the added potential for saving Europe’s “economy and democracy”.

It is not only the prospect of Mr Trump weaponising America’s control of the global payments systems to penalise Europe – as the US regularly does to countries with which it quarrels – that is causing unease among EU financial and economic officials.

They worry, too, about the possibility of Mr Trump eroding the independence of the US central bank, the Federal Reserves, after Jerome Powell, the current chairman, departs in a few months. They fear that with a pliant Fed, Mr Trump could leverage, to his own ends, the central bank’s position as a provider of short-term dollar liquidity, or swap lines, to its European counterparts.

CARICOM MORE VULNERABLE

Since late last year, financial stability officials in the EU have discussed the feasibility of lessening Europe’s reliance on the Fed for dollar-denominated backstops by pooling dollars held by central banks outside the United States.

Meanwhile, the European Central Bank (ECB) has been telling the bloc’s banks to closely watch their dollar exposure and build appropriate reserves to, if required, ride out market volatility.

“ Capital headroom could be needed to absorb higher currency volatility and counterparty credit risk,” the ECB said in a report in November. “ Banks should hold liquid US dollar assets to counterbalance outflows and act as a stabilising intermediary.”

If the Europeans have these concerns, as well as feel that they should prepare not just for the vagaries of markets, but Mr Trump’s caprice, then the small countries, like the members of the Caribbean Community (CARICOM), which depend heavily on the United States for critical correspondent banking services, are far more vulnerable. Given their limited scope for action they have to be vigilant and, as much as possible, be prepared.

With respect to a regional payments and settlements mechanism, CARICOM may have a headstart on the EU, although the community appears to be too slow in advancing the system.

In 2023, CARICOM central banks agreed to adopt, and adapt, the Pan-African Payments and Settlement System, developed by the African Export-Import Bank (Afeximbank), for use in the region.

Last summer, two of them, Barbados and The Bahamas, completed a proof of concept of the system, which for the region is called the CARICOM Payments and Settlement System (CAPSS). They were to be joined by two other central banks, including the East Caribbean Central Bank (ECCB), the central bank for the seven-member Organisation of East Caribbean States (OECS), in a full-fledged pilot of the system.

Timothy Antoine, the governor of the ECCB, has said that when operational, CAPSS will move money “faster and cheaper”. Importantly, it would also reduce the region’s “reliance on correspondent banks” in facilitating intra-regional transactions.

STATUS OF PILOT

With CAPSS, CARICOM may have come full circle. For, on its face, the system appears to share many of the characteristics, albeit with modern, digital bells and whistles, of the Multilateral Clearing Facility – the 1970s and ‘80s arrangement CARICOM had in place to manage, on a net settlement basis, trade payments between its members, some of which, especially Jamaica and Guyana, faced severe foreign exchange crises.

While only about 10 per cent of CARICOM’s trade is intra-regional, that, in 2023, accounted for around US$3.6 billion. However, visible trade is not the only area of commerce for which settlements are necessary.

Periodically, Caribbean countries are threatened with the loss of vital correspondent banking services, especially when major economies are dissatisfied with their domestic policies. The complaints usually range from failing to collect tax compliance information from non-nationals to perceived weak adherence to global anti-money laundering and anti-terrorism financing regulations.

Recently, CARICOM has talked little about CAPSS, including the status of the pilot. That process, however, should be accelerated and kinks quickly ironed out. The OECS already has harmonised legislation and rules on settlements between its members. The other CAPSS partners may have to adjust their laws and regulations ahead of a full

roll-out. They should get on with it.

Adopting CAPSS won’t mean de-linking from the global system. But, it will give CARICOM a bit of insulation. That should be quickly embraced before others attempt to sabotage the effort.