Institutional Analysis of de-risking

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Institutional Analysis of De-Risking

Introduction

De-risking is a term used to describe the decision of financial institutions to reduce their exposure to certain types of customers or businesses. This can be done for a variety of reasons, such as concerns about compliance with anti-money laundering and counter-terrorism financing regulations (AML/CFT), reputational risk, or operational costs.

De-risking has become a major concern in recent years, as financial institutions have become increasingly cautious in their dealings with certain customers and businesses. This is due in part to the increasing complexity of AML/CFT regulations, as well as the growing threat of financial crime.

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      However, de-risking can also have negative consequences, particularly for legitimate businesses and individuals. For example, it can make it more difficult for businesses in developing countries to access financial services, and it can also make it more difficult for individuals in high-risk countries to open bank accounts or send money abroad. Main Text This paper will provide an institutional analysis of de-risking, focusing on the following key questions:

• What are the main factors that drive de-risking?
• What are the potential consequences of de-risking for legitimate businesses and individuals?
• What can be done to mitigate the negative consequences of de-risking?

The main factors that drive de-risking The main factors that drive de-risking include:

• AML/CFT regulations: AML/CFT regulations are designed to prevent financial institutions from being used to launder money or finance terrorism. However, these regulations can be complex and costly to comply with, and financial institutions may be reluctant to do business with customers or businesses that they perceive as being high-risk.
• Reputational risk: Financial institutions are concerned about protecting their reputation. If they are associated with a financial crime, it can damage their brand and lead to a loss of customers.
• Operational costs: De-risking can increase operational costs for financial institutions. For example, they may need to invest in new systems and procedures to comply with AML/CFT regulations.

The potential consequences of de-risking for legitimate businesses and individuals The potential consequences of de-risking for legitimate businesses and individuals include:

• Reduced access to financial services: De-risking can make it more difficult for businesses and individuals to access financial services. This can make it difficult to start or grow a business, and it can also make it difficult to meet basic financial needs, such as sending money abroad or saving for retirement.
• Increased costs of financial services: De-risking can also lead to increased costs of financial services for businesses and individuals. This is because financial institutions may charge higher fees to customers or businesses that they perceive as being high-risk.
• Exclusion from the financial system: In some cases, de-risking can lead to businesses and individuals being excluded from the financial system altogether. This can have a devastating impact on their lives and livelihoods.

What can be done to mitigate the negative consequences of de-risking? A number of things can be done to mitigate the negative consequences of de-risking, including:

• Improving the effectiveness of AML/CFT regulations: AML/CFT regulations should be designed in a way that is effective in preventing financial crime without placing an excessive burden on financial institutions.
• Providing financial institutions with more support to comply with AML/CFT regulations: Financial institutions should be provided with more support to comply with AML/CFT regulations, such as through training and guidance.
• Promoting financial inclusion: Governments and financial institutions should work together to promote financial inclusion for all businesses and individuals, including those who are perceived as being high-risk.

Critique of Two Media Articles on De-Risking Article 1: "De-Risking: The Unintended Consequences of the Fight Against Financial Crime" by The Economist Article 2: "De-Risking: A Threat to Financial Inclusion" by the World Bank Comparison of the questions that the authors raise Both articles raise important questions about de-risking. However, they focus on different aspects of the issue. Article 1 focuses on the unintended consequences of de-risking, such as the impact on legitimate businesses and individuals. Article 2 focuses on the threat of de-risking to financial inclusion. Comparison of the approach the authors use Article 1 uses an economic approach to analyze de-risking. It examines the drivers of de-risking, the potential consequences for legitimate businesses and individuals, and the costs and benefits of different mitigation strategies. Article 2 uses a political approach to analyze de-risking. It examines the role of governments and regulators