The US Department of the Treasury has revealed the 2023 De-Risking Strategy, which examines the phenomenon of financial institutions de-risking. Mandated by Congress in the Anti-Money Laundering Act of 2020, the Strategy is the first of its kind, and it investigates the impact of de-risking on financial institutions while providing policy options to combat it.

When de-risking happens, financial institutions terminate or restrict business relationships indiscriminately with broad categories of customers instead of actively managing the risk of those customers. According to mondovisione. com, de-risking has a negative impact on US government policy objectives, as it minimises financial activity within the regulated financial system while slowing down remittances, preventing the unencumbered transfer of humanitarian aid and disaster relief, and preventing low and middle-income citizens from accessing the financial system.

The report was created following extensive consultations with the public and private sector. These consultations involved talks with banks, small and medium-sized Money Service Businesses (MSBs), and diaspora communities that depend on these businesses for remittances. Several small businesses and humanitarian organisations were also consulted for this strategy, all in an effort to understand the root cause of de-risking as well as its negative impacts.

The strategy’s main takeaways The 2023 de-risking strategy is in line with the current administration’s efforts to create a more transparent and accessible financial system while improving national security by protecting the system from bad actors. One of the strategy’s key findings is that financial institutions engage in de-risking procedures in order to protect their profits. Speaking of profitability, it is influenced by several factors, including the cost of implementing AML/CFT compliance measures, and the financial institution’s available resources.

The appetite for risk, reputational risk, regulatory burdens, and a lack of clarity when it comes to regulatory expectations have also been identified as factors that drive financial institutions towards de-risking. The strategy offers several recommendations regarding the promotion of consistent regulatory expectations, as well as providing better incentives to US banks to avoid de-risking. These recommendations also aim to support public and private engagement and cooperation at home and abroad.

As for the implementation of these recommendations, Treasury will get in touch with partners in the public and private sectors in order to come up with a viable plan. Apart from addressing key issues in the US financial sector, the strategy also aims to support the effectiveness of the US Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) framework. De-risking is also present in other parts of the world, including Europe.

In January 2022, the European Banking Authority (EBA) published its opinion on the impact of de-risking in the EU and the steps authorities should take to tackle unwarranted de-risking. The EBA’s findings suggested that de-risking had a detrimental impact on the achievement of EU’s objectives in relation to fighting financial crime effectively and promoting financial inclusion, competition and stability in the single market. .