European Banking Authority Publishes Opinion on Detrimental Impact of De-Risking by Financial Institutions

The European Banking Authority has published an Opinion and related report on the detrimental impact of financial institutions' "de-risking" decisions under the EU Fourth Money Laundering Directive. De-risking involves financial institutions refusing to enter into, or terminating, business relationships with counterparties who are associated with higher money laundering or terrorist financing risk, in order to comply with requirements under MLD4. MLD4 mandates that financial institutions should establish policies and procedures to manage the risks to which they are exposed, including ML/TF risks. However, the EBA has found evidence of de-risking of entire categories of customers, without considering individual risk profiles. This can have detrimental effects, including on the EU's objectives on fighting financial crime and the stability of financial systems of EU Member States, as well as reducing financial inclusion.

The EBA's report sets out the issues reported by those affected by de-risking, e.g., the loss of corresponding banking relationships by respondent banks and the loss of some payment institutions from the market. There are also indications that FinTech firms handling virtual currencies are particularly affected by de-risking. The report also discusses the rationale behind firms' decisions to de-risk particular categories of customers, the EBA's assessment of the key drivers and impact of de-risking and provides an overview of the initiatives taken by national regulators to address de-risking.
 
The EBA's Opinion concludes that national regulators should take greater efforts to ensure the root causes of unwarranted de-risking are addressed. The EBA points to its existing guidance on de-risking that could address some of these issues. It also sets out a series of further steps that national regulators could take, including engaging more actively with institutions that de-risk and those who are particularly affected by de-risking and reminding financial institutions that they can opt to offer only basic financial products and services where warranted by their ML/TF risk assessment.
 
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