The impact and opportunity of bank de-risking

Mitch Trehan explores how an alternative approach to traditional correspondent banking could benefit the casualties of de-risking and bring a wider economic boost

by | May 4, 2022 | Banking Circle

It cannot be considered ‘news’ that big banks are carrying out widespread de-risking strategies – indeed, they have been doing so for decades. Withdrawing from certain markets and geographies to reduce and remove risk is nothing new. However, the last decade has brought with it a swathe of challenges which have pushed big, traditional banks to dramatically accelerate their de-risking activity.

As a direct result of this necessary self-preservation, banks are unwittingly creating fundamental threats for smaller financial institutions (FIs), and a ripple effect across the industry. Recent Banking Circle research examined the impact and opportunities of the ongoing de-risking trend.

The 2008 financial crisis brought about a shift in the political agenda and that of the regulators. The latter began to see banks as more of a target than ever before and changed focus away from working alongside banks to combat financial crime. In 2012, HSBC paid US authorities $1.9 billion in a settlement over money laundering, sparking the de-risking movement that is still affecting the industry today.

Unfortunately, as a consequence, smaller banks, non-bank financial institutions (NBFIs) and businesses found themselves without correspondent banking partners. Customers were unable to send or receive cross-border payments, meaning they could not expand into global markets. This financial exclusion remains, and for some it has got worse. Today, smaller banks and NBFIs are facing a fundamental threat to their operations which could have global societal and economic risks.

Surveying the de-risking landscape

Between 2011 and 2019, the number of active correspondent banks worldwide fell by approximately 22% due in part to big bank de-risking strategies, according to data from the Bank for International Settlements. This has led to fewer options available to smaller banks and NBFIs, less competition in the market and nothing to challenge the rising costs of cross-border payments.

The results of Banking Circle’s recent research, published in a white paper – ‘Big Bank De-Risking: The invisible threat to financial inclusion’ – shows  banks and NBFIs are dissatisfied with the traditional correspondent banking solution. Of thebanks and non-bank FIs surveyed, 77%  have more correspondent banking relationships now than ten years ago, with over half (64%) saying they believe they have too many.

Having spoken to FIs of all sizes, Banking Circle believes this is a reaction to de-risking, with smaller banks and NBFIs protecting themselves from the impact of de-risking by spreading their own risk. But this is a heavy burden. Banking Circle’s research revealed correspondent banking costs have increased for 80% of the banks and NBFIs surveyed, and the real-life impact of this is that 3 in 4 believe they have lost customers due in part to a lack of access to fair priced correspondent banking partners.

Many of those who have been let go by their bank were given less than two months’ notice, and most of the survey respondents have struggled to obtain correspondent banking partners at some point in the past decade, so this short notice period is potentially extremely damaging. Those who have fewer relationships now than ten years ago have since experienced difficulties in offering international payments, and costs have risen.

Some of the FIs Banking Circle spoke to have proactively reduced the number of banking relationships; half of these did so for cost reasons.

A solution must be found to overcome these challenges, helping increase financial inclusion among businesses and consumers around the world. Less than half of the respondents to the study believe there are any good alternatives to traditional cross-border payments, and 71% feel an alternative would benefit the global economy.

Building a new route forward

Access to cross-border payments requires a bank at the top of the chain, with direct access to clearing. There is no getting around this fact, so a new approach to correspondent banking is required. That is what Banking Circle is doing.

The Payments Bank is taking on a job very few banks want to tackle – investing in integrating a vast network of local clearing and payments schemes to build a unique super-correspondent banking network.

Avoiding a sector or region which appears high risk may be the quick-win option, but this can easily exclude customers and impede the progress of businesses that could be highly valuable to the economy. Even the highest risk emerging market can include customers that are low risk. Through an external partner like Banking Circle, even the smallest banks and NBFIs can capitalise on the opportunities.

Banks and NBFIs can provide their business customers with secure, lower cost cross-border payments, connecting to clearing via the Banking Circle payment rails, rather than the outdated and expensive traditional correspondent banking network.

Banking Circle is a fully licenced next generation Payments Bank that is designed to meet the global banking and payments needs of banks and NBFIs.  As a technology-first bank, it connects FIs to the world’s major currencies and enable them to move funds efficiently – delivering fast, low-cost payments to their underlying customers.

Download Banking Circle’s full white paper here: Big Bank De-Risking: The invisible threat to financial inclusion.

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