Glossary term
De-Risking
Subject: Financial Crime, AML/CFT Framework and Standards
Also known as: Derisking
De-risking happens when a bank drops whole customer categories or country business wholesale, rather than judging each client on its merits, because the controls needed cost more than the relationship earns.
Explanation
Under a risk-based approach a bank is expected to judge each customer individually and apply controls in proportion. De-risking happens when it instead exits a whole group: money transfer operators, charities, small respondent banks, or clients in a certain country. The reasons are usually the cost of controls, fear of heavy fines and low profit on the business. The effects are felt well beyond the bank. Legitimate customers lose access to accounts, remittances shift to informal channels that are harder to supervise, and financial inclusion suffers. FATF, the Financial Stability Board and national supervisors have warned that wholesale exits conflict with the risk-based approach. Correspondent banking has been the best-known case. Pushing activity out of regulated channels can leave financial crime harder to see, not smaller.
Example
Sixty small banks in several developing countries lose their accounts when a large bank reviews its respondent banking portfolio and closes them, citing the cost of enhanced due diligence. Most had no adverse findings. Their customers' cross-border payments now travel through other routes, and two of the countries report slower remittances for families.
Not to be confused with
- Risk mitigation
- Mitigation keeps a customer and applies controls to reduce risk. De-risking removes the customer without testing whether controls could work.