The risks of de-risking

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De-risking, which involves the cancellation of correspondent relationships by large international banks, has slowed globally but continues to threaten Latin America and the Caribbean. There are many variables that affect de-risking in the region. The perception of risk is an important factor in understanding why large international banks decide to reduce or cut ties with local banks in the region. Economies of scale also play a significant role in whether international banks decide to leave or stay in a particular country or market. Naturally, larger countries with more banks are at less risk of de-risking. However, this puts pressure on smaller countries in the region and potentially makes them less attractive for international banks to establish or maintain correspondent relationships. Although the largest waves of de-risking have passed through the region, greater banking regulations and increased compliance have created a scenario where larger international banks become more selective in their de-risking process.

Manuel Orozco, director of the migration, remittances and development program at the Inter-American Dialogue, asserts that there are potential risks associated with de-risking related to the variables mentioned previously. Specifically the decision of larger international banks to end correspondent relationships with smaller, local banks due to perceived risks despite evidence to the contrary

Comments by Manuel Orozco :

“Regulations and decisions by banks to cut ties rather than work in smaller economies might increase country risk if countries become isolated from the global financial system.”

“Transparency, which AML/CTF is supposed to improve, could actually suffer if countries lose correspondent banking relationships and have to rely on cash-based operations.”  

“Just imagine what would happen if a country were forced to fly in plane loads of dollars because it no longer had correspondent banking relationships.”

Read the full interview on The Banker

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