Introduction

Ms. Liu introduced the phenomenon of the withdrawal of CBRs, commonly referred to as “de-risking,”¹ including by citing reports of how this trend affected a number of regions, such as Latin America and the Caribbean, Africa, and Asia, and noted in particular how it affected small jurisdictions, as well as fragile and conflict-affected states (for example, its impact on remittance flows to Somalia). Although this trend can affect financial intermediation and financial inclusion, ultimately the termination or withdrawal of CBRs is the result of banks’ business decisions that reflect a cost-benefit analysis. In addition, although there have been trends in the reduction of CBRs, most institutions have been able to find replacements or put in place alternative arrangements.

What is “De-Risking”?

Ms. Gardineer noted the negative connotation associated with the term de-risking, defining the phenomenon as the “whole-scale exiting of either geographies or customers without regard to understanding on a case-by-case basis what level of risk is posed to the correspondent bank.” Accordingly it is important for banks to focus on risk evaluation, case by case, in line with a risk management approach, whereby banks are required to periodically assess the risks posed by certain customers and whether they have the appropriate levels of control to manage that risk.

Ms. Scutt agreed with the negative connotation of the term de-risking, stating that the decision by banks to withdraw from certain relationships is in response to banks’ risk management decisions. These decisions are based on which types of risks the banks find to be no longer manageable, including to avoid being the “last man standing” when engaging with a potentially risky bank.

Mr. Al Qulish explained the Financial Action Task Force’s (FATF’s) definition of de-risking as “the situation where banks or financial institutions terminate or restrict business relationship with clients or categories of clients to avoid rather than manage the risk in line with the FATF risk-based approach.” The FATF is trying to help financial institutions understand that the risk-based approach does not mean wholesale termination of relationships but rather that FATF recommendations require case-by-case analysis of risks. The FATF is concerned with the effect of “de-risking” on the global financial system.

Mr. Stein defined de-risking as “a series of arbitrary actions through which financial institutions determine to terminate, deny, or limit their relationships with certain clients” without the necessary knowledge, due diligence, and understanding of these clients and their transactions.

Ms. Erbenova noted that the IMF’s concern with “de-risking” stems from many banks reacting to the new postcrisis environment, which may cause negative externalities for cross-border financial flows and has potential effects on financial stability and macroeconomic consequences. These issues are relevant to the IMF’s surveillance mandate and may necessitate the provision of policy advice to affected member countries. The IMF promotes the implementation of international standards by assisting countries in developing their national regulatory and supervisory frameworks and by facilitating a dialogue on this phenomenon.

What is the Evidence of “De-Risking,” and How Does it Materialize?

Mr. Stein explained the effect Mexico has experienced from “de-risking,” including on correspondent accounts and remittances, and the difficulty for Mexican banks to repatriate US dollars. From the supervisory authority perspective, the focus should be to ensure that Mexican banks follow proper due diligence processes. On the positive side, this has given financial institutions in Mexico a greater understanding of the importance of compliance with anti-money laundering/combating the financing of terrorism (AML/CFT) obligations to fight financial crime and maintain the credibility of the financial system.

Mr. Al Qulish noted that the FATF had conducted a study in the Middle East and North Africa in 2015. He mentioned that some financial institutions have not taken on certain customers, such as charities or politically exposed persons.

Ms. Scutt explained that evidence of “de-risking” from certain banks’ perspective revealed concerns as to their ability to manage financial crime risk. This has an effect on certain countries and customers, including money service businesses and pawn brokers, which involve a heavy movement of cash. In addition, there are issues of trade finance, which is also cash-flow driven.

Ms. Gardineer elaborated that larger banks have seen account closures of well-established banking relations, which could result in transactions being driven underground, making them especially vulnerable to money-laundering risks. These banking decisions have not been arbitrary, however, but rather based on weaknesses, as identified in consent orders issued against banks, which led to risk re-evaluation by banks.

Ms. Erbenova noted that global evidence is to date largely survey-based, such as the surveys by the World Bank on remittances and CBRs, the Union of Arab Banks focusing on the Middle East and North Africa, the Association of Banking Supervisors of the Americas, and the British Bankers Association. The Caribbean has been particularly affected, with at least 15 banks in five countries losing their CBRs, including two central banks. Affected customers included small and medium exporters and small and medium banks, for whom the cost of due diligence is higher. Ms. Erbenova emphasized that “de-risking” is not limited to emerging markets or low-income countries, and that the United States and Europe are not immune.

As to the possible effect on financial stability, financial inclusion, and macro-economic consequences, Ms. Erbenova indicated that there is no conclusive evidence in terms of a reduction of cross-border flows. There could be, however, a more significant effect felt in smaller countries. For example, the reduction of correspondent banking relations in the Bahamas has affected remittances to Haiti (in Haiti, remittances are 23 percent of GDP, and 75 percent of these remittances come from the Bahamas). Samoa serves as a hub for money service businesses, through which intermediate remittances flow. The effect on remittance flows could potentially affect vulnerable groups and their livelihoods. Issues with the fragmentation of the regional banking system could have negative economic implications if they affect trade downstream.

What Are the Drivers and Consequences of “De-Risking”?

Mr. Stein mentioned that the reduction of financial services has affected Mexico’s financial inclusion and the interconnection of the financial system. This has been reflected in decisions by global banks and through the knock-on effect on local banks’ relationships with less-regulated financial institutions and certain client relationships. Although there are limited hard data on “de-risking,” several cases confirm this trend. There is a need for sharing client information to build confidence in relationships with global banks. Mexico has taken steps to address this issue, including by making necessary amendments to the Mexican legislation to enhance the sharing of information.

Ms. Gardineer noted that US regulators do not require banks to apply the know your customer’s customer principle as a general rule. However, in a risk-averse environment, banks should have some understanding on the client relationship, type and volume of transactions, and client’s activities to know if a suspicious transaction has occurred. Banks should also conduct regular customer due diligence. The situation could improve if supervisory expectations were effectively communicated, and the realities of how foreign correspondent accounts, remittances, and clearance of US dollars are effectuated in the financial system were better understood. One of the drivers is the increasing costs of compliance, particularly with regard to the Banking Secrecy Act and AML/CFT requirements, which must be balanced against the cost-benefit analysis of maintaining relationships with high-risk customers. Other drivers include concerns related to financial crimes, incongruent risk appetites, and adjustments of business strategies for certain geographic regions.

Ms. Scutt noted that the geopolitical landscape has changed significantly, posing challenges for banks on the frontline in terms of ensuring that legitimate payments can flow into and out of conflict and postconflict areas. The sanctions regime has led banks to have a zero tolerance for risk. In addition, there are issues with data protection and data privacy that inhibit global banks from sharing suspicious transaction reports and are barriers to information-sharing on risky clients. Another driver is global banks’ concerns with the scale of the fines imposed through enforcement actions.

Ms. Gardineer noted that the zero-tolerance risk policy has stemmed from the posteconomic downturn, when banks were “truly hanging on for their financial lives” and were more focused on compliance and being risk-averse.

What Are the Potential Responses to “De-Risking”?

Ms. Scutt noted that a collective solution with the private sector, public sector, and law enforcement is needed to mitigate the risk of financial exclusion and financial intermediation. Potential responses could include focusing on beneficial ownership, documentation for individuals who are disadvantaged, looking at safer corridors, and increasing capacity building for certain countries. There are potential ways to increase customer information through technological initiatives for individuals who are financially excluded.

Mr. Stein outlined two main actions to address “de-risking.” Countries must build stronger AML/CFT regimes to regain credibility. In addition, countries, including the United States, must provide further guidance to banks on procedures to maintain or terminate a business relationship. For example, Mexico has strengthened its AML/CFT regime and has revised its legal framework to better comply with the new FATF standards. The National Banking and Securities Commission has been working on transitioning to a risk-based approach to supervision, which allows for a more targeted supervision of banks.

Mr. Al Qulish spoke of the measures taken by the FATF to address the misinterpretation of one of the drivers of “de-risking.” He recommended that FATF develop guidance on how to manage the risk in the context of correspondent banking and to assist money remitters to identify the risk and apply a risk-based approach.

Ms. Gardineer noted initiatives planned by the Office of the Comptroller of the Currency, including engagement with prudential regulators and with the public and private sectors. Guidance—in terms of expanding knowledge of the drivers and consequences of “de-risking”—would be part of the solution.

Ms. Erbenova noted the role of the public sector, especially in enabling a legal and regulatory environment that would allow for adequate risk management. The public sector can help with contingency planning when a country is cut off from all correspondent flows, including considering creating safe corridors for payments to continue flowing to it. In addition, when “de-risking” is a regional trend, the public sector could help set up regional arrangements to process transactions and consider providing industries with utilities to facilitate customer due diligence.

Questions from the Audience

Question: Are there circumstances where it would be justified for a government to interfere in a bank’s decision to close an account—for example, when the government perceives the consequence of closing a big client account to be disastrous? Ms. Gardineer: The United States has a policy that recognizes that financial institutions are private entities and can make business decisions without government interference. The Office of the Comptroller of the Currency, however, is trying to engage further with financial institutions so that they understand better the drivers and consequences of “de-risking” and to ensure there is good governance behind those decisions.

Question: What can be done in cases where the private sector would reasonably consider a relationship too risky, but there is a need for continued international transfers, for example, to Somalia. Would you establish different kinds of channels for payments in those instances?

Ms. Gardineer: There is a need for a collective response and to develop better guidance and understanding of supervisory expectations—which may include ways for financial institutions to understand the weak points that give them concern—but maintain some aspects of foreign correspondent banking or remittance activity. Collaboration will help institutions understand whether there is an opportunity to take that type of an approach and still maintain strong, safe sound controls without having dire consequences on certain countries.

Question: Do we need to find measures that are more binding, and not just directives or guidelines that go toward financial inclusion, but rather strike a good balance between risk assessment and banks’ business decisions? Mr. Stein: This is to be determined through case-by-case analysis. Mexico has issued directives requiring banks to have clear procedures in determining whether they should keep a client and to ensure that banks follow these procedures. Ms. Scutt: One way of striking the balance is by looking at categories of customers subject to risk reassesment, such as charities and money service businesses, that may not have the same stringent standards as applied to banks, and ensuring the same quality of supervision for these institutions.