Ten years ago, the financial crisis damaged the financial industry and led to government action. Regulatory controls were implemented to protect the economy and reinforce the global financial system.A decade later, we can now look back and see how banks and other financial players responded, and where the regulatory controls have led us. Many of the changes have been positive, but others have had unintended consequences for both the financial services industry and its customers.One of the unexpected consequences for the global financial system has been de-risking, and it is time we address its threat to the livelihood of people around the world.
According to the Global Center on Cooperative Security, de-risking refers to financial institutions closing the accounts of clients perceived as high risk for money laundering or terrorist financing abuse, such as money service businesses, nonprofit organizations, and correspondent banks.
Put simply, de-risking is when organizations seek to limit exposure to risk by ceasing to bank entire categories of activity without regard to the actual risk represented by each individual customer – it is treating industries in a one size fits all manner. Rather than adopting steps to continue to serve clients, some banks are cherry-picking services with lower regulatory costs and higher profits.
It is entirely correct that financial institutions conform with regulatory requirements. However, the actions some are taking to do so go far beyond anything that has been mandated by any regulator. It is in a sense a very simple and crude way of removing risk from their books and the consequences are far-reaching.
This approach is not consistent with the global guidelines issued by the Financial Action Task Force and regulations issued by many countries across the world, which call for banks to take a “risk-based” approach to evaluating their customers and specifically state that banks should not remove entire categories of financial services from their portfolio. Instead, the guidelines ask banks to take a case-by-case look at the risks presented by their potential client’s customer base, and determine whether their AML program meets that risk.
The first consequence is that bank de-risking undermines financial inclusion and therefore interferes with the UN sustainable development goals, because global banks have been limiting correspondent banking relationships (CBRs) with local banks in emerging and developing economies. According to the Financial Stability Board, there has been a reduction in the number of CBRs on the global level.With this reduction, many developing nations cannot access vital financial services, which limits their financial inclusion capabilities and interferes with their ability to engage in trade and access finance for infrastructure and community development.
Second, bank de-risking undermines anti-money laundering and combatting the financing of terrorism (AML/CFT) objectives, which, paradoxically, the toughened regulations were designed to target. According to the World Bank, by pushing these transactions out of the regulated system into more opaque, informal channels, they become harder to monitor. Therefore, AML/CFT transactions are more difficult to catch.
Finally, bank de-risking may increase the cost of remittances, therefore undoing the trend of lower fees and progress in recent years. According to the Center for Global Development, as financial institutions withdraw from types of activities that they perceive as riskier, there is an impact on cost of remittance flows because remittance service providers are forced to turn to higher cost alternatives, remittance corridors cease operating altogether because the cost of providing them is no longer economical, or money has to be shipped in cash or through other informal methods which are inherently insecure and prone to risk.
At Western Union, we know the significant impact that de-risking has on many of our customers and the global economy at large.When entire categories of people or geographic regions are eliminated from a bank’s portfolio, it impacts whole communities that need to move money across borders. It pushes people away from the formal financial system, which jeopardizes their financial security.
That is why Western Union has been working with governments, regulators, multilateral organizations and banks around the world to highlight the consequences tied to de-risking.The Global Compact for Migration was developed with intent for nations to act together in combatting the issue of de-risking as a means of progress towards the UN Sustainable Development Goals.It is encouraging to see the international community acknowledge the problem, but still, not enough has changed.
What are governments doing to ensure that individuals around the world are able to bank? The people who suffer most are those who are financially excluded, so what is being done to prevent this?
Enough reports, enough round-tables, enough discussion. Talk is cheap. It is time for meaningful and impactful change.This problem requires unity. It requires a willingness and determination from nations and banking systems around the world to work together to solve the dire consequences of de-banking. It is high time the global community takes action.
Chloe MacEwen,Western Union ,VP of Public Policy, Europe and Barbara Span, Western Union VP Public Affairs, MEA/APAC
ECB stays put but warns about surge in infections
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.
Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.
But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.
“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.
Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.
Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.
She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.
The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.
Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.
Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.
But she signalled those risks were less acute, in part thanks to the recent Brexit deal.
“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”
Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.
“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.
Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.
There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.
The ECB has indicated it may not even need it to use it all.
“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.
Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.
Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.
With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.
(Editing by Catherine Evans)
Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger
By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.
BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.
“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.
As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.
In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.
But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.
“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”
While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.
“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.
NO EXIT EYED
Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.
Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.
Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.
He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.
“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”
(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)
World Bank, IMF agree to hold April meetings online due to COVID-19 risks
WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.
The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.
This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.
(Reporting by Andrea Shalal; Editing by Chris Rees
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