Banking as a business used to be less complicated. There were fewer regulations, and the choice of services was simple compared with the myriad now on offer. Trust was a central pillar in an individual’s or company’s relationship with their bank.
The emergence of a much more complex world has changed all that, with a surge in banking regulations trying to keep up — whether event driven (9/11) or otherwise, the pace of digital innovation, increasingly cunning and technically savvy fraudsters, information security threats reaching unprecedented levels, you name it.
Though banks have enhanced and enriched the lives of one if not two generations, trust has taken a beating. Trust about where someone’s money comes from. Trust about who they are. Trust even deriving from where they live.
At the personal level, this means that customers have had to answer a lot more questions from their banks. Failure to convince them completely of their bona fides can result in closure of accounts by their banks.
But at the banking and corporate level, the impact has been more seismic.
In the UAE there is some business that banks just can’t do any more. Companies of all shapes and sizes here have a very international outlook, relying to a great extent on trade — and their banks to help them do it. That depends on what is called “correspondent relationships” with foreign banks, to help clear foreign currency payments.
It is these relationships that have over time become hard to manage for banks operating in the UAE. De-risking — or the elimination of banking services with certain categories of customers — is a direct consequence of this situation.
In certain markets correspondent relationships have been aggressively managed and de-risked by foreign correspondent banks in an attempt to protect themselves from regulatory fallout and related reputational consequences. The UAE is one of those markets.
For instance, international banks in the UAE have curtailed almost 90 per cent of their relationships with exchange houses and general trading companies as a result of de-risking.
Local banks have also had to turn away business, especially when it is US dollar denominated. That has particularly impacted SMEs, employment, and to an extent the economy as a whole.
But de-risking can have more unfortunate side effects. It can unintentionally impact other types of legitimate transactions and businesses, not just in the private sector but government related entities as well.
This situation is of course unsustainable. As a trading nation the UAE needs to compete vigorously, openly and effectively. But what can be done to make sure it can do this without let or hindrance?
The first thing is to recognise that managing risk is what banks do. It lies at the heart of their whole business philosophy. So in one way you could say that de-risking is just a rather extreme version of risk management that addresses the changing face of risks. Managing risk successfully needs to be a top priority for all banks. But it’s a balance that needs to be carefully struck.
If the level of risk management is excessive, whether imposed directly or indirectly and beyond reasonable norms by any party, it interferes with legitimate business activity and ceases to bring overall positive results, thereby becoming more of an impediment. Regulators have an important role to play in ensuring the safety and soundness of their respective banking systems, but fear alone won’t drive the right decisions. And with great power must come great responsibility.
What’s more, given the scale and diversity of international trade today, de-risking has by its own best estimates only been partially successful. It works at the top level, but misses much of what happens below, so some business and finance is thus driven underground. And that is not good for risk management, nor for sustainable and legitimate business.
One specific area that can and should be looked at more carefully is the role of exchange houses. Their level of regulation and supervision in the UAE can and should be improved. While some have invested in training and the adoption of effective compliance processes, not all have. Their performance is being seen as a gauge for the financial sector as a whole, and as such needs to be raised to as high a level of probity as possible.
But there is a small glimmer of light in all of this. Some elements in the US regulatory community are themselves beginning to consider whether de-risking might have overshot its mark. Earlier this year the Wall Street Journal reported that the US Comptroller of the Currency had acknowledged that decisions to terminate relationships with foreign correspondents for fear of money laundering or cyber threats could have “regrettable consequences.”
Inclusion and fair trade
Tellingly, they also said that customers whose banking relationships were terminated and who could not make alternate banking arrangements elsewhere may effectively be cut off from the regulated financial system altogether.
In a world where countries and international organisations are striving hard to encourage inclusion and fair trade, de-risking is in fact pulling in the opposite direction. While the UAE has been impacted, we must accept that safe and effective banking also means keeping our own house in order. There is much we can still do to show how far we have come in adopting global best practices and demonstrating that we can self-regulate at a world-class level. But there is also a very strong case for the progress we have made to be acknowledged by our global trading partners.