Banking Circle on the impact of bank and fintech de-risking

Big banks are rapidly de-risking, withdrawing from certain markets and geographies. Creating fundamental threats for smaller Financial Institutions, the ripple effects go right through the global economy. Banking Circle research examines the impact and opportunities of the de-risking trend.

Banks have been executing de-risking strategies for decades, to reduce and remove risk. However, the past decade has seen the level of activity increase dramatically. In 2012, HSBC paid US Authorities $1.9 billion in a settlement over money laundering, sparking the de-risking movement that is still affecting the industry today.

Unfortunately, that has left smaller banks, Non-Bank Financial Institutions (NBFIs), and businesses without correspondent banking partners, which can lead to financial exclusion for underlying customers. This situation remains today, and for some, it has become worse. Smaller banks and NBFIs are facing a fundamental threat to their operations that could have global societal and economic risks. The latest Banking Circle research investigated these threats.

Assessing the impact of de-risking

The results of this research will be published in an upcoming white paper and show that banks and NBFIs are dissatisfied with the traditional correspondent banking solution. 77% of the Banks and non-bank FIs we spoke to have more correspondent banking relationships now than ten years ago, and most (64%) feel they have too many.

We believe this is a reaction to de-risking, with smaller banks and NBFIs protecting themselves from the impact of de-risking by spreading their own risk. But this is a heavy burden. Our research revealed that correspondent banking costs have increased for 80% of the banks and NBFIs we surveyed, and the real-life impact of this is that three in four respondents believe they have lost customers due in part to a lack of access to fair-priced correspondent banking partners.

Some of the financial institutions we spoke to have proactively reduced the number of banking relationships they have, and half of these did so for cost reasons. In cases where the bank or NBFI was let go by their bank, the main reason given was that the customer no longer met new eligibility criteria. Those who have reduced the number of relationships have since experienced difficulties in offering international payments, and costs have risen.

It is unsurprising, therefore, that 71% of respondents feel the global economy would benefit from an alternative solution. However, to gain access to cross-border payments, there must still be a bank at the top of the chain with direct access to clearing. Rather than an entirely new solution, correspondent banking services must change to become more accessible.

As a tech-first payments bank, Banking Circle is investing in integrating a vast network of local clearing and payments schemes to build a unique super-correspondent banking network that is a true alternative to the traditional offering.

Research and text provided by Banking Circle