Deliberating derisking

Blog | 6 March 2017


Derisking has become a buzzword in the financial services industry. For most people, it is immediately associated with the insurance/assurance industry and asset liability management in the pensions business. More recently, the word has come into banking and, in particular, the importance of managing relationships with customers, counterparties (such as correspondent banks) and third parties (Know Your Customer's Customer or KYCC).

Perhaps the simplest fact is that banks are becoming more risk averse for various reasons. Regulation at an international (Basel III and four in progress) and at a local level have suggested (or imposed) capital and liquidity requirements with an inevitable impact on profitability. Correspondent relationships have become less profitable and, simultaneously, both easier (you don't need a bank in every port) and more difficult
to maintain (increasingly onerous and costly compliance requirements).

For example, KYCC imposes the need to look through relationships and, added to the complexity of anti money laundering (AML) and combatting the financing of terrorism (CFT) prevention measures, there are also tax transparency laws, most notably the US Foreign Account Tax Compliance Act (FATCA). Financial Action Task Force (FATF) guidance is going some way to accepting that not everything that is related to correspondent banks are high risk, but levelling the regulatory playing field isn't easy and guidance is guidance, not a rule. Things are not made any easier when politicians like to grandstand and may, willingly or not, exert pressure on the implementation of already complex regimes.

All these constraints have contributed to a general reluctance to take on business which contains a credit risk, counterparty risk or reputational risk. The sheer amount of documentation can be frightening and it may be simpler just to walk away and put up the closed sign.

But there remains a great opportunity for those banks which have the capacity to jump over the hurdles or run through the hoops. It takes time, commitment and expertise. Digitisation should also help on some levels to improve process and visibility. It's also heartening to see enlightened multilateral agencies such as the ADB taking
a lead (see article on page 36).

I have been speaking to some of the practitioners in the industry and the future is there for them. Derisking is not an excuse for doing nothing. It could just be the right encouragement to check out the processes and look for more business.

Katharine Morton is editor-in-chief of TFR


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