Scotiabank has officially exited retail banking in Panama, Costa Rica, and Colombia, marking a significant retreat from Latin America amid mounting compliance costs and de-risking pressures. The deal, which grants Scotiabank a 20% stake in Banco Davivienda in exchange for its retail operations, reflects a broader trend among international banks reassessing their presence in the region.
Strategic Realignment
Scotiabank’s exit aligns with CEO Scott Thomson’s 2023 commitment to refocus on more profitable North American markets. This decision marks the conclusion of a decade-long expansion that initially challenged the prevailing de-risking trend. In 2012, Scotiabank made a bold entry into Colombia by acquiring a majority stake in Banco Colpatria for $1 billion, followed by the 2016 purchase of Citibank’s retail operations in Costa Rica and Panama for $360 million.
However, while Scotiabank was expanding, other global banks were already reassessing their footprint in high-risk markets. Adrian Stokes, CEO of Quantas Capital in Jamaica, noted, “As large international banks providing payment services to the region face tougher compliance measures, many have determined that the costs outweigh the benefits. As a result, many have ceased offering correspondent banking services to regional banks.”
Rising Compliance Costs and De-risking Trends
The shift has accelerated due to increasing compliance costs and heightened regulations on anti-money laundering (AML) and combating the financing of terrorism (CFT). The US Treasury, the European Union, and the intergovernmental Financial Action Task Force (FATF) have designated certain markets as high risk, further raising operational expenses. Additionally, stricter capital requirements introduced after the 2008 financial crisis have contributed to the retreat of international banks.
Latin America and the Caribbean have been particularly affected, with the former losing an average of 30% of its correspondent banks, according to a 2020 Bank for International Settlements report. The Bahamas, Belize, Dominica, Jamaica, and St. Vincent and the Grenadines all lost at least 40% of their correspondent banks between 2011 and 2020, with Trinidad and Tobago just below that threshold.
Economic Consequences
The banking pullback has limited access to international finance and credit in regions that rely heavily on remittances and tourism. In Central America, remittances contribute 20% to 27% of GDP, while in some Caribbean nations, tourism accounts for up to 90% of GDP. In 2022, tourism directly provided 1.8 million jobs and generated an estimated $62 billion for the Caribbean, nearly half of the region’s projected $136 billion GDP in 2024.
Reduced correspondent banking relationships increase transaction costs for cross-border payments, hinder trade finance, and disrupt cashless payment adoption in key sectors like hospitality. Clients face challenges such as reduced access to trade finance, delays in clearing foreign money transactions, and heightened concerns over dollar supply in certain countries.
Impact on Financial Institutions
Over the past decade, major financial institutions have faced significant penalties for regulatory violations. HSBC was fined $1.9 billion for laundering cartel money in Mexico, and in 2024, Wachovia and TD Bank were fined a record $3 billion by the US Treasury’s Financial Crimes Enforcement Network.
Christopher Mejia, an emerging markets sovereign analyst at T. Rowe Price, highlighted the additional challenges for the Caribbean: “Operating costs must account for natural disasters, a tougher business environment than Central America, and lower profit margins. Reputational risks from privacy laws and scandals, such as the Panama Papers, have further complicated operations.”
De-risking has also affected money transfer organizations (MTOs) like MoneyGram, PayPal, UAE Exchange, and Western Union, which have reduced their exposure to the region.
The Future of Banking in Latin America and the Caribbean
While Scotiabank retains its commercial banking operations in Colombia to serve private companies with international banking needs, its retail exit signifies a major shift in capital allocation. Thomson stated in December 2023, “The return profile of the international bank has not been commensurate with the risk, and it has been a drag on overall returns.”
As global banks retreat, local and regional banks are stepping in to fill the gap. Bancolombia and Grupo Aval—owners of Banco de Bogotá and the BAC group—are expanding significantly in Central America. Bancolombia acquired Banco Reformador in Guatemala for $411 million in 2013, while Grupo Aval took a 40% stake in Banco Agromercantil for $217 million.
Mejia noted, “Colombian banks have deep knowledge of Central America’s operating environment and economies of scale, which gives them a competitive edge.”
Interestingly, Scotiabank’s Caribbean operations remain profitable. In 2024, Scotiabank Bahamas reported a 46% increase in net income year-over-year, reaching $70 million. Scotia Group Jamaica also saw a 46% rise in pre-tax profits, totaling $164 million.
Solutions and Challenges Ahead
For Latin America and the Caribbean, the banking retreat necessitates regulatory adaptations and innovative financial solutions. Mejia suggests that “niche players willing to work with regulators could emerge as key disruptors in the market.”
Some potential solutions include:
Blockchain and Fintech: While promising, these technologies face the same regulatory challenges as traditional banks. In Mexico, 50 firms await verification by the National Banking and Securities Commission (CNBV), a process notorious for delays.
Central Bank Digital Currencies (CBDCs): The Eastern Caribbean digital currency DCash represents a potential path forward, but widespread adoption is hindered by regulatory inconsistencies and cybersecurity concerns.
Cybersecurity remains a critical challenge. A 2021 survey by the International Information System Security Certification Consortium found Latin America lacked 530,000 cybersecurity professionals, exacerbating risks related to digital banking.
Regulatory Uncertainty
Governments in the region argue that inconsistent rulemaking by the US Treasury, FATF, and the EU contributes to de-risking challenges. Some leaders, such as Panamanian President José Raúl Mulino, have criticized the process, calling it unfair. Last fall, Mulino warned that companies from countries failing to update their tax haven lists would be excluded from state contracts. This policy could have major implications for projects such as the $6 billion–$8 billion high-speed Panama-David railway.
Adrian Stokes concludes, “There is no silver bullet for the compliance challenges the region faces. The only sustainable solution is for countries to collaborate on strengthening AML/CFT controls.”
As international banks scale back, Latin America and the Caribbean must navigate evolving financial landscapes while fostering regulatory cooperation and innovation to sustain economic stability.
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