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The phenomenon of de-risking: Unintended consequences and possible solutions
Global commerce relies on correspondent banking to execute international transactions. Due to the increasing cost of compliance, however, some US-based global financial institutions have been terminating their correspondent banking relationships — a practice known as de-risking. In some cases, correspondent banks have even terminated their relationships with central banks. This kind of situation creates systemic risk at a country level, and central banks are looking at alternatives to better serve the needs of their respective financial systems. This paper analyses prior work and surveys on the magnitude of de-risking, and cross-references the findings with recent surveys conducted in the Dominican Republic and Argentina to determine whether market failures and systemic risk are inevitable. The results indicate that while the situation is not yet catastrophic, it is sufficiently precarious that foreign countries that rely on the US dollar should start looking for alternative solutions for global correspondent banking immediately. The paper also describes some of the alternatives currently available, including intervention from the Federal Reserve Bank of New York, regional payments systems, and smaller US correspondents.
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Jorge Jimenez is Chairman of both Juniper Payments LLC and the Global Fintech Forum LLC, providing payments solutions to financial institutions around the world. He also advises foreign governments on payment systems and financial inclusion on behalf of the US Treasury. He has a master’s in business administration from a joint programme between the London School of Economics and Bocconi University of Milan, and is presently pursuing a PhD in economics from UNED University in Madrid. In 2019, he received the Rich Oliver Leadership in Payments Award.
Jose Maria Labeaga Azcona is Professor of Economic Theory at the Spanish Open University, UNED, where he is also Director of the Economics and Business PhD programme. His previous roles include General Director of the Spanish Institute for Fiscal Studies and Director of the FEDEA-BBVA Research Chair for New Consumers. He has a PhD in economics from the Autonomous University of Barcelona and his research has been published in such journals as Economic Journal, Journal of Econometrics, Journal of Applied Econometrics, Energy Policy and Energy Economics.