Introduction

Imagine it's a regular Monday, and out of the blue, you receive a voicemail or email from your correspondent delivering some unexpected news – changes to their compliance policies. To your dismay, they regretfully inform you that they can no longer provide services to your institution. So, what's your next move? It's time to dust off that business continuity plan and quickly call up your backup correspondent. Oh, you don't have one? Well, now is the moment to find a new one, asap!

Understanding De-Risking

There are numerous reasons why this situation may have occurred, and it's important to remember that not all of them are necessarily your fault. As regulations evolve or are perceived to evolve, correspondents adjust their risk tolerance accordingly. The problem lies in their all-or-nothing approach.

Reasons for De-Risking

1. Inadequate size as a client: Correspondent banks aim to generate profits, and unfortunately, if you fall on the smaller end of their client base, they sometimes prioritize their focus on larger institutions. They have non-interest income targets, just like you, and may deem the compliance costs associated with small revenue clients unworthy.

2. Discontinued product or service: Occasionally, when there is a change in leadership, correspondents opt for a new direction. If your correspondent no longer offers a particular product or service, it is not a personal reflection on your institution but rather a logical decision to discontinue the offering.

3. Restricted customer/member: This is perhaps the most challenging situation, where one of your customers or members becomes classified as high-risk by the correspondent bank. Rather than attempting to find a resolution, the correspondent chooses to de-risk the entire institution. The reasons for this action could range from your customer/member operating as a money services business, having connections to cryptocurrencies, the cannabis industry, or engaging in transactions with higher-risk locations or beneficiaries. If this scenario applies to your institution, it is worth exploring the possibility of carving out that specific customer/member to mitigate the impact.

The Escalating Nature of De-Risking

We regularly receive calls from institutions facing de-risking challenges, and due to recent events like the FTX debacle and the SVB closure, correspondents are becoming more stringent with their risk profiles. Even the Treasury Department has expressed concern, as indicated in their report here.  

Navigating the Impact of De-Risking

Undoubtedly, being de-risked presents a host of difficulties. If you haven't already done so, it is considered best practice to establish redundancy in your correspondent relationships before an emergency arises. Building multiple partnerships and diversifying your options will provide you with greater resilience in navigating such situations.

Conclusion

In the unpredictable landscape of compliance policies, sudden changes from correspondents can be a challenging reality to face. However, by understanding the reasons behind de-risking and taking proactive measures to establish backup correspondents, you can mitigate the impact and ensure the continuity of your institution's operations.