Correspondent Banking De-Risking: A Systemic Problem

Correspondent banking de-risking is, in my view, one of the most consequential and least understood structural problems in the global financial system. It is the upstream source of a large proportion of the banking access problems I deal with every day. Understanding it properly is essential for anyone trying to make sense of why legitimate businesses in certain sectors cannot access banking services — and why that problem is structural rather than incidental.

How Correspondent Banking Actually Works

Most international payments don't travel directly from one bank to another. They travel through a chain of correspondent relationships — typically involving one or more large "hub" banks that maintain accounts at each other (nostro/vostro relationships) and through which smaller banks access the global payment system. A small bank in Malta can process a dollar payment because it has a correspondent relationship with a larger European bank, which in turn has a USD correspondent account at a major US institution like JPMorgan Chase or Citibank.

The critical point is this: the US correspondent banks, in particular, are subject to US law and US regulatory expectations — including the Bank Secrecy Act and OFAC sanctions regime — for any dollar flows they process, regardless of where those flows originate. And the fines levied on major US correspondent banks for BSA violations — BNP Paribas's $8.9 billion settlement, HSBC's $1.9 billion, Commerzbank, Deutsche Bank — have created an environment of extreme caution about any flow that could expose the correspondent to US enforcement risk.

The Cascade Effect

The consequence of this is what I call the cascade effect. A major US bank decides it won't accept dollar flows associated with certain business categories — gambling, cannabis, certain money services businesses. That bank communicates this restriction to its correspondent partners. Those European and Asian banks, whose US dollar access depends entirely on maintaining their US correspondent relationship, face a choice: lose their US correspondent relationship or apply the same restrictions to their own clients. For virtually every bank, maintaining US dollar access is non-negotiable. So the restriction cascades down the chain.

The result is that a policy decision made by a compliance officer at JPMorgan Chase in New York effectively determines whether a licensed iGaming operator in Malta can access a bank account in Luxembourg. The Malta bank's relationship manager may have perfectly good reasons to want to service that client. The Luxembourg regulator may have no objection. But the correspondent chain constraint makes it operationally impossible. This is what I mean by a systemic problem.

Who Loses Most

The populations that lose most from correspondent banking de-risking are not the sophisticated multi-jurisdictional businesses — they find workarounds, use specialist providers, build multi-banking strategies. The people who lose most are the populations most dependent on remittances: migrant workers sending money home to families in countries that have lost correspondent relationships. The World Bank estimates that the reduction in correspondent banking relationships has increased the cost of remittances in affected corridors by significant margins, and in some cases made those corridors completely inaccessible through formal channels.

This is the devastating irony: anti-money laundering policy, ostensibly designed to protect the financial system from criminal abuse, is pushing remittance flows into informal value transfer systems — hawala networks and their equivalents — that are far less transparent to law enforcement than the formal banking system they replaced. The crime-reduction logic runs exactly backwards.

What Regulators Should Do

I have three concrete suggestions. First, the US financial regulators — the Fed, OCC, and FinCEN — need to issue explicit guidance making clear that proportionate risk assessment for correspondent relationships, rather than blanket sector exclusion, is consistent with BSA compliance. The "super-correspondent" fines created a chilling effect that was disproportionate to the actual compliance problem. Calibrating the guidance to encourage reasonable risk-taking rather than maximum avoidance is essential.

Second, the FSB and CPMI should continue and accelerate their work on reducing friction in correspondent banking chains — including ISO 20022 adoption, LEI-based counterparty identification, and the development of multilateral information-sharing frameworks that reduce the due diligence burden on individual correspondent relationships. Third, the FATF mutual evaluation process should include an explicit assessment of whether countries' implementation of FATF standards is generating disproportionate de-risking as a side effect, with consequences for evaluations that show this pattern.

CCYFX's Alternative Approach

In the absence of systemic change, specialist payment providers like CCYFX operate by building direct settlement relationships and payment infrastructure that doesn't rely on the same correspondent chain constraints that affect traditional banks. We work directly with networks that understand the business categories we serve. Our payment infrastructure is built to enable flows that the traditional correspondent chain struggles with — not by circumventing compliance, but by building the compliance capability that makes those flows manageable for the institutions we work with.

It's a workable solution for individual businesses. But it doesn't fix the systemic problem, and I want to be clear that I don't think it should. The correspondent banking de-risking crisis needs to be solved at the system level by regulators, international bodies, and large banks recognising the harm their policies are creating. The specialist sector plugs gaps; it can't replace the global plumbing.