Unintended costs of "de-risking" by banks must be mitigated

SINCE the global financial crisis of 2008, financial institutions have endured a slew of regulatory strictures, ranging from prescriptions on capital adequacy to a broadening of anti-money laundering (AML) laws.

The rules set out to reinforce financial systems' resilience and halt the use of banks as conduits for illicit activity such as tax evasion and the financing of terrorist activities. It is clear from recent large penalties that flouting the rules is costly. In 2015, a US judge slapped a US$8.9 billion fine on BNP Paribas for breaking sanctions against three regimes. In 2012, HSBC paid US$1.9 billion in fines to the US authorities over the laundering of drug money out of Mexico. Even Singapore has meted regulatory action. Last year, two Swiss banks - BSI Bank and Falcon Private Bank - were shut down over AML breaches and some banks were fined.

It is therefore not surprising that globally, banks are choosing to "de-risk'', that is, to terminate or restrict relationships with certain types of clients to avoid risk. Today, however, there is increasing concern that de-risking - a rational response to increasingly onerous regulations - is creating unintended consequences. As banks cut down on their "correspondent banking relationships'' (CBRs) - relationships with other banks to enable the completion of transactions such as cross-border payments and foreign currency settlements - access to much-needed finance in the emerging markets is being cut off. This chokes off trade financing, and disproportionately affects small- and medium-sized enterprises (SMEs) in developing countries. Even charities in high-risk areas are hard hit; some have had bank accounts closed without explanation.