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.\u00a0 Trustwas a central pillar in an individual\u2019s or company\u2019s relationship with their bank.
\nThe emergence of amuch more complex world has changed all that, with a surge in banking regulations trying to keep up \u2013 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.
\nThough banks have enhanced and enriched the lives ofone if not two generations, trust has taken a beating.\u00a0 Trust about where someone\u2019s money comes from.\u00a0 Trust about who they are.\u00a0 Trust even deriving from where they live.
\nAt 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 inclosure of accounts by their banks.
\nBut at the banking and corporate level, the impact has been more seismic.
\nIn the UAE there is some business that banks just can\u2019t do any more.Companies of all shapes and sizes herehave a very international outlook, relying to a great extent on trade – and their banks to help them do it.\u00a0 That depends on what is called \u201ccorrespondent relationships\u201d with foreign banks, to help clear foreign currency payments.
\nIt is these relationships that have over time become hard to manage for banks operating in the UAE.\u00a0 De-risking\u2013 or the elimination of banking services with certain categories of customers – is a direct consequence of this situation.
\nIn certain markets correspondent relationships have beenaggressively managed and de-risked by foreign correspondent banks in an attempt to protect themselves from regulatory fallout and related reputational consequences.\u00a0 The UAE is one of those markets.
\nFor instance, international banks in the UAE have curtailed almost 90% of their relationships with exchange houses and general trading companies as a result of de-risking.
\nLocal 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.
\nBut de-risking can have more unfortunate side effects.\u00a0 It canunintentionally impact other types oflegitimate transactions and businesses, not just in the private sector but government related entities as well.
\nThis 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?
\nThe first thing is to recognize that managing risk is what banks do.\u00a0 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\u2019s a balance that needs to be carefully struck.
\nIf 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, therebybecoming more of an impediment.\u00a0 Regulators have an important role to play in ensuring the safety and soundness of their respective banking systems, but fear alone won\u2019t drive the right decisions. And with great power must come great responsibility.
\nWhat\u2019s more, given the scale and diversity of international trade today, de-risking has by its own best estimates only been partially successful.\u00a0 It works at the top level, but misses much of what happens below, so some business and finance is thus driven underground.\u00a0 And that is not good for risk management, nor for sustainable and legitimate business.
\nOne specific area that can and should be looked at more carefully is the role of exchange houses.\u00a0 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.\u00a0 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.
\nBut 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.\u00a0 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 \u201cregrettable consequences.\u201d
\nTellingly, 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.
\nIn a world where countries and international organizations are striving hard to encourage inclusion and fair trade, de-risking is in fact pulling in the opposite direction.\u00a0 While the UAE has been impacted, we must accept that safe and effective banking also means keeping our own house in order.\u00a0 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.<\/p>\n","protected":false},"excerpt":{"rendered":"
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.\u00a0 Trustwas a central pillar in an individual\u2019s or company\u2019s relationship with their bank. The emergence of amuch more complex world has changed all that, with a surge in banking …<\/p>\n