The House Subcommittee on Financial Institutions and Consumer Credit recently examined the nuances of de-risking, which is the process of terminating relationships deemed high risk to minimize compliance risk exposure.
“The overly-punitive supervisory and examination tactics employed by federal financial regulators that came in the wake of the financial crisis have had dramatic implications on the availability of financial products and services in all of our communities,” Rep. Blaine Luetkemeyer (R-MO), subcommittee chairman, said.“Banking relationships with so-called high-risk clients have become cost-prohibitive for financial institutions, due in large part to heightened compliance expectations. As a result, many institutions have opted to terminate relationships. This decision has resulted in the elimination of consumer and small business access to financial products and services, a decrease in the availability of money remittances and reduced flow of humanitarian aid globally.”
Officials said the dialogue helped determine many legitimate businesses are shut out of the banking industry because of de-risking and that de-risking can result in branch closures that can have far-reaching consequences on entire communities. Congress should continue to examine the issue, the subcommittee said, to determine the key drivers of de-risking and consider regulatory and legislative opportunities to ensure equal and consistent access to the financial system.
“De-risking is a phenomenon that has had dramatic impacts on the international financial system over the last decade,” Gabrielle Haddad, COO of Sigma Ratings Inc. and a subcommittee witness, said. “These practices have impacted the concentration of trade flows and cross-border payment activity, which challenges financial stability and inclusion for affected markets. Where there are emerging market institutions who can demonstrate their commitment to complying with international best practice, we should create avenues for their participation.”