What is Bank Derisking?
Ever since the financial crisis sent the world reeling a decade ago, governments have been tightening banking regulations to reduce financial crimes and boost confidence in the markets. Along with greater scrutiny of banks, comes greater consequences for missteps. In the United States, the strictest country, fines for enabling financial crimes rose dramatically, from tens of millions of dollars per year (among all US banks) to billions of dollars.
In reaction to such crackdowns, skittish banks around the world have been engaging in a process called derisking, dropping customers and geographic areas that they deem too high-risk for money laundering, the financing of terrorism, or disregarding international sanctions. For example, when some banks in Latvia were caught with dirty money, international banks like JPMorgan Chase pulled out of the country entirely, leaving people there with a drastically curtailed ability to conduct business or make cross-border payments in dollars.
A major criticism of bank derisking is that it punishes the many for the crimes of a few. The abandonment of Latvia occurred after the country had brought several of its banks into alignment with its strict AML regulations. Derisking leaves the nations, business, and individuals who are most desperately in need of capital without the means to improve their situation. In the absence of funding from established financial institutions, people in developing nations are more likely to turn to illegal channels, like black markets, for survival. In this way, tougher financial crime regulations end up exacerbating the very problems they were meant to solve.
How Could Derisking Affect My International Business?
Even in high-risk countries, there are many creditworthy customers and reliable, well-managed suppliers and partners with whom to do business. When transferring money to these countries, keep in mind the potential effects of derisking.
Fewer Money Transfer Options
Local banks and small money transfer providers in developing countries often rely on international “correspondent” banks to process transactions involving foreign currency exchange. As derisking correspondent banks drop service, these smaller financial entities struggle to stay in business. Many of them either fold or merge with larger competitors.
Africa was particularly hard hit by the derisking trend. SWIFT data released last year as part of a report on the unintended consequences of derisking shows a sharp reduction in the number of correspondent banks serving the continent. Between 2013 and 2015, South Africa saw a 10 percent decrease, and Mauritius (pictured above) suffered a decline of 18 percent.
Fortunately, larger money transfer providers, like Western Union, Ria, and MoneyGram (with a combined global market share of 25%), can clear international transactions independently and are therefore less affected by derisking. In addition, these industry giants need to comply with regulatory agencies in their home countries, so cross-border payments sent through them are protected from illegal activity.
Higher-Cost Money Transfers
Poor financial infrastructure and the lack of local competition aggravated by derisking usually makes transferring money to developing countries more expensive. While remittances to Sub-Saharan Africa have declined in cost by 22% since 2011, which is a hopeful statistic, they are still significantly more expensive than the global average.
But using a money transfer company can make the cost of cross-border payments to high-risk regions a lot more palatable, because they tend to be much cheaper than banks. Try out our comparison tool to find the most cost-effective provider for your needs.
What is Bank Derisking?
Ever since the financial crisis sent the world reeling a decade ago, governments have been tightening banking regulations to reduce financial crimes and boost confidence in the markets. Along with greater scrutiny of banks, comes greater consequences for missteps. In the United States, the strictest country, fines for enabling financial crimes rose dramatically, from tens of millions of dollars per year (among all US banks) to billions of dollars.
In reaction to such crackdowns, skittish banks around the world have been engaging in a process called derisking, dropping customers and geographic areas that they deem too high-risk for money laundering, the financing of terrorism, or disregarding international sanctions. For example, when some banks in Latvia were caught with dirty money, international banks like JPMorgan Chase pulled out of the country entirely, leaving people there with a drastically curtailed ability to conduct business or make cross-border payments in dollars.
A major criticism of bank derisking is that it punishes the many for the crimes of a few. The abandonment of Latvia occurred after the country had brought several of its banks into alignment with its strict AML regulations. Derisking leaves the nations, business, and individuals who are most desperately in need of capital without the means to improve their situation. In the absence of funding from established financial institutions, people in developing nations are more likely to turn to illegal channels, like black markets, for survival. In this way, tougher financial crime regulations end up exacerbating the very problems they were meant to solve.
How Could Derisking Affect My International Business?
Even in high-risk countries, there are many creditworthy customers and reliable, well-managed suppliers and partners with whom to do business. When transferring money to these countries, keep in mind the potential effects of derisking:
Fewer Money Transfer Options
Local banks and small money transfer providers in developing countries often rely on international “correspondent” banks to process transactions involving foreign currency exchange. As derisking correspondent banks drop service, these smaller financial entities struggle to stay in business. Many of them either fold or merge with larger competitors.
Africa was particularly hard hit by the derisking trend. SWIFT data released last year as part of a report on the unintended consequences of derisking shows a sharp reduction in the number of correspondent banks serving the continent. Between 2013 and 2015, South Africa saw a 10 percent decrease, and Mauritius (pictured above) suffered a decline of 18 percent.
Fortunately, larger money transfer providers, like Western Union, Ria, and MoneyGram (with a combined global market share of 25%), can clear international transactions independently and are therefore less affected by derisking. In addition, these industry giants need to comply with regulatory agencies in their home countries, so cross-border payments sent through them are protected from illegal activity.
Higher-Cost Money Transfers
Poor financial infrastructure and the lack of local competition aggravated by derisking usually makes transferring money to developing countries more expensive. While remittances to Sub-Saharan Africa have declined in cost by 22% since 2011, which is a hopeful statistic, they are still significantly more expensive than the global average.
But using a money transfer company can make the cost of cross-border payments to high-risk regions a lot more palatable, because they're typically much cheaper than banks. Try out our comparison tool to find the most cost-effective provider for your needs.
