Glossary term
De-risking in Correspondent Banking
Subject: Financial Crime, Customer Due Diligence and Correspondent Banking
Also known as: Correspondent account closures, Loss of correspondent banking relationships
De-risking is when a correspondent bank ends or limits services to whole categories of respondent banks or countries without judging each on its own controls, leaving some places short of access to international payments.
Explanation
Correspondent banks face heavy penalties for sanctions and money laundering failures, and monitoring a respondent's hidden customers is costly. When the expected profit from a small respondent looks lower than the compliance cost or the risk, the correspondent may exit. In recent years this has led many banks in small or higher-risk economies to lose their dollar and euro links, which pushes remittances and trade towards informal channels that are harder to supervise. Standard-setters such as FATF and the Financial Stability Board have said that a blanket exit is not what a risk-based approach intends, and that banks should judge each respondent on its own controls. Responses include better information sharing, KYC utilities, capacity building for respondents and clearer supervisory expectations. A closure backed by a documented finding of unmanageable risk is ordinary risk management, and only the blanket exit gets the label.
Example
Reviewing its correspondent portfolio, a large international bank decides to close all accounts held by banks in a small island economy, because transaction volumes are low and review costs are high. Several of those respondents have strong controls. Within a year, local firms struggle to pay overseas suppliers, and the central bank asks the international bank and its peers to discuss reopening channels with extra safeguards.
Not to be confused with
- Risk-based exit
- A risk-based exit follows a case assessment showing unmanageable risk. De-risking ends relationships by category, without individual assessment.