What is derisking?
When a financial institution decides not to do business in a sector, region or country because they perceive it as too risky for their risk assessment/risk appetite, they withdraw their services from regional banks, removing their access to international finance. This has implications for international trade and global banking.
From our work with banks in emerging markets we have seen the impact of de-risking at first hand. We conducted research in 2017 into the numbers of correspondent banking relationships by geography which quantified the scale of de-risking by region. The research found a 25% drop in global correspondent banking relationships linked to de-risking.
We recognise the irony that the regulation designed to protect the global financial system is, in a sense, having an opposite effect and forcing whole regions outside the regulated financial system.
However, we still see oppportunities and believe that there is good business to be done in high risk geographies. One of the factors that has contributed to de-risking is that the cost of compliance has grown and the risk/reward balance has become unfavourable for large clearing banks. If we want to reverse this trend and begin to ‘re-risk’, then the ‘antidote’ will require more granular level due diligence and proper risk assessments to provide large clearers with the confidence that they can deal with low risk businesses in high risk jurisdictions.
Take a deeper dive into the research and our thinking on how to promote financial inclusion by reviewing the content here.