U.S. Banks' Response to Regulatory Crackdown May Be Hurting Banks Globally

The jettisoning of entire categories of customers by U.S. banks is hurting banks in other parts of the world, according to the president of the international body that sets money-laundering standards.

Foreign banks that rely on large American institutions to access the global financial system are increasingly being held to the same standards that have led U.S. banks to embark on so-called derisking, said Roger Wilkins, president of the Financial Action Task Force.

"The American banks and the big European banks are saying, 'If you want to engage as correspondent banks, you're going to have to comply with the same sorts of requirements that we believe we have.' And so it's having a follow-on effect," Wilkins said, referring to derisking.

The concerns bubbling up outside the U.S. are likely to be discussed at the upcoming February meeting of the Paris-based Financial Action Task Force, whose 34 member nations include the world's largest economies.

Back in October, the international group expressed concern about the derisking trend, saying that banks should take a risk-based approach to determining who to bank and make judgments on a case-by-case basis, rather than terminating entire categories of customers.

"When we talk about a risk-based approach, we mean something much more fine-grained than derisking entire swaths of customers on the basis of coming from a particular country, or banking with a particular intermediary," Wilkins said in a recent interview.

Referring to the blanket approach that some U.S. banks now appear to be implementing, he said: "You pick up a lot of innocuous people, as well as maybe the odd ones that have got a problem."

Derisking is happening at a time of stepped-up scrutiny of banks with respect to money laundering, terrorist financing and consumer protection rules.

In June, BNP Paribas agreedto pay $8.9 billion to U.S. authorities for alleged anti-money-laundering violations. Operation Choke Point, the Department of Justice's investigation of banks' role in payment fraud, has also been cited as contributing to banks' wariness about entire categories of merchants, such as payday lenders.

So when regulators now complain that banks are going too far with derisking, to many bankers it sounds like a mixed message.

"It could be complicated in any particular case. However, it just seems ironic that after so many years of the banks being the whipping boy for not managing certain risks, when they attempt to do so, to have everyone jump on the bandwagon as an apparent reflex and say, 'Oh no, you can't do that,' " said David Chenkin, a lawyer at Zeichner Ellman & Krause who frequently represents financial institutions.

But Wilkins suggested that the wholesale derisking that seems to be under way at some U.S. financial institutions is out of proportion with the risks they face from regulators. Referring to recent settlements, he said: "Most of them seem to be relatively egregious."

Wilkins, who serves in the Australian government in addition to his post with the Financial Action Task Force, also said that regulatory scrutiny might not be the only factor that's causing banks to de-risk. He cited Basel III capital requirements and banks' efforts to clean up their balance sheets as other potential contributors.

And he argued that some of the derisking that's happened at banks is appropriate, given the risks that certain customers present. But, he added, "It should have been done probably in a more targeted fashion."

The Mexican government is among those worried about the follow-on effects of derisking, according to Wilkins. Numerous African nations are similarly concerned, he said.

In terms of solutions, Wilkins raised the idea of allowing U.S. banks to rely more heavily on the judgment of their foreign correspondent banks, rather than having to do their own analyses of the risks involved.

"The question is, to what extent would we be willing to look at some system of mutual recognition in some cases?" Wilkins asked.

U.S. officials are expressing greater skepticism about the notion that loads of legitimate customers are losing their bank accounts as a result of derisking.

"A financial institution that refuses to do business with customers that present a risk profile that the institution cannot manage is doing the right thing. That is not 'derisking,' " Treasury Undersecretary David Cohen said in a Nov. 10 speech. "So, is 'derisking' actually occurring? The evidence is decidedly mixed."