Voice of the Industry

Reducing the risk of Bank de-risking – Banking Circle

Monday 22 November 2021 09:21 CET | Editor: Oana Ifrim | Voice of the industry

Banking Circle's Mitch Trehan shares his insights on the consequences of bank de-risking strategies, and an emerging new approach to correspondent banking

New research commissioned by Banking Circle has found that the past ten years has seen Tier 2 and Tier 3 banks as well as non-bank financial institutions (NBFIs) face increasing costs from their growing network of correspondent banking partners. 77% of respondents have more relationships now than they did ten years ago – most feel they have too many – and 80% have seen correspondent banking costs rise in the same period.

While most have had to take on additional relationships to remain competitive and keep serving diverse customer requirements, many report that they had found themselves let go by their banks – often with less than two months’ notice. Much of the time, the reasons given for ending the relationship included no longer meeting eligibility criteria (61% of those who were let go by their banks). Banks and NBFIs found that having fewer relationships has led to difficulties offering international payments, and costs have risen still further.

Between 2011 and 2019, the number of active correspondent banks worldwide fell by approximately 22%, due, in part to de-risking strategies. 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. Many smaller financial institutions, whether banks or NBFIs, have been forced to withdraw cross border payment products. As a result, businesses, individuals and even entire regions in the developing world have found themselves more financially excluded than ever.

Where it all began

Banks have been developing and executing de-risking strategies for many years, decades, in fact. However, the rate at which de-risking activity takes place has undoubtedly increased dramatically in the past decade. In 2012 HSBC paid US authorities USD 1.9 billion (GBP 1.2 billion) in a settlement over money laundering, sparking the ongoing global de-risking movement.

In the wake of the 2008 financial crisis, the political agenda shifted and so too did the agenda of the financial regulators. Rather than working alongside banks to combat financial crime, the regulators changed focus, beginning to see the banks as more of a target. 

Banks were effectively forced to de-risk or introduce measures to protect themselves. They found it far quicker and easier to remove clients or entire sectors and regions that sat beyond their new risk appetite, than to carefully assess the risk of each account individually. This risk-evading action left smaller banks and NBFIs without correspondent banking partners – leading to financial exclusion for many of their customers.

Emerging markets that desperately need economic support represent higher risks and higher costs, meaning risk-averse banks have been quick to pull out of these regions. Without correspondent banking relationships in place, the financial institutions serving these regions quickly feel the impact. 

Our researched showed that 3 in 4 banks and NBFIs believe a lack of access to fairly priced correspondent banking partners has been a significant factor in the loss of customers. This loss inevitably leads to remittance volumes and profits falling. 

Looking to the future

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 Banking Circle study believe there are any good alternatives to traditional cross border payments, and 71% feel that an alternative would benefit the global economy.

The truth is, there is in fact no ”real” alternative at all. 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 instead we need to take a new approach to correspondent banking, and that is just what Banking Circle is doing.

We are taking on a job that 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 that 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.

In our recent webinar, ‘The risks of de-risking’, a panel of experts discussed the impact and opportunities of bank de-risking strategies. Available on-demand, the webinar provides unique insights to help smaller banks and NBFIs to continue serving customers seamlessly and efficiently.

About Mitch Trehan

Mitch Trehan is the UK Head of Compliance and MLRO at Banking Circle and a regular public speaker. Mitch, who started his career in the RAF training as a Pilot before moving into financial services, has more than 19 years’ experience in Corporate Banking and FinTech, having held senior positions in Citi, Barclays, JP Morgan, Ebury, Currency Solutions and Banking Circle. Mitch is the co-chair of the ‘Interbank Payment Policy Committee’ for UK Finance, the chair of ‘Project Banking Access’ for the Payments Association, and a member of the Executive Committee of the Association of Foreign Exchange & Payments Companies.  

About Banking Circle 

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 that reduces the cost of using technology, we connect financial institutions to 25 of the world’s major currencies and enable them to move funds efficiently – delivering fast, low-cost payments to their underlying customers. Learn more about Banking Circle at www.bankingcircle.com 


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Keywords: Banking Circle, de-risking, banks, cross-border payments
Categories: Banking & Fintech | Payments General
Countries: World
This article is part of category

Banking & Fintech