Banks find support in US ‘de-risk’ move

|Arabian Post Special|The UAE Central Bank is solidly backing the UAE banks in dealing with the ‘de-risking’ policies imposed by US banks on the UAE banks. The central bank is seized of the problems faced by the UAE banks in this regard.

The new U.S. regulations have imposed extra burdens and costs on banks in the United States, which is forcing these banks to cut their international relationships and correspondent bank arrangements with banks in other parts of the world, particularly the Gulf.

The latest meeting of the UAE Banks Federation also discussed the issue and decided to explore the possibilities of reducing the impact of the US banks’ move.

“De-risking” or “de-banking” refers to the practice of financial institutions exiting relationships with and closing the accounts of clients perceived to be “high risk.”

Rather than manage these risky clients, financial institutions opt to end the relationship altogether, consequently minimizing their own risk exposure while leaving clients bank-less.

Regulatory authorities outside the US continue to emphasize that de-risking is not in line with international guidelines, and in fact is a misapplication of the risk-based approach. Yet in the absence of clear instructions or an incentive to bank these clients, account closures continue across the United States, the United Kingdom, and Australia. These closures have significant humanitarian, economic, political, and security implications, effectively cutting off access to finances, further isolating communities from the global financial system, exacerbating political tensions, and potentially facilitating the development of parallel underground “shadow markets

Underlying the practice of de-risking is the assumption that the affected customers present a higher risk of using their bank accounts as a medium for raising, moving, and storing funds that are somehow tainted. For example, the accounts could be used to launder money, finance terrorist activity, violate sanctions regimes, or support other illicit activities, such as drug smuggling or tax evasion.

Financial institutions have rejected the role of primary watchdog in select markets and instead opt to remove themselves from these markets altogether. However, the lack of transparent criteria for de-risking has left affected customers unclear of expectations and often feeling unduly persecuted.

The closure of correspondent banking accounts presents a tangible threat to international trade finance, particularly for the developing world. Correspondent banking relationships are the connective tissue linking various points across the global financial system, offering foreign banks access to US and European financial markets and, more importantly, foreign currency.

This is Important for emerging markets as the majority of the world’s cross-border capital flows, including commodity markets and trade finance, are conducted in US dollars. The US dollar is used for 44.6 percent of all world payments, followed by the euro at 28 percent and the British pound at nearly eight percent.