De-Risking

What Is De-Risking?

De-risking refers to the practice of financial institutions terminating or restricting business relationships with entire categories of clients to avoid risk rather than manage it. The Financial Action Task Force (FATF) defines it as institutions choosing to cut off broad customer segments "to avoid, rather than manage, risk in line with the FATF's risk-based approach."

Rather than investing in enhanced due diligence to evaluate each customer individually, banks make a blanket calculation: the compliance costs and regulatory exposure of serving certain client types outweigh the revenue those accounts generate. The result is that entire industries and geographies lose access to the formal financial system. This practice is also called "de-banking" because it effectively excludes people and businesses from banking services altogether.

The categories most commonly affected include foreign correspondent banks, money service businesses, money transfer operators, non-profit organizations, embassies, customers in jurisdictions flagged as high-risk, and digital asset companies. For the unbanked populations that depend on these intermediaries, de-risking can cut off access to the global economy entirely.

How It Works

De-risking typically follows a predictable pattern driven by the economics of compliance:

1. Regulators increase enforcement around anti-money laundering (AML) and counter-terrorist financing (CTF) requirements, raising the penalties for compliance failures
2. Banks conduct internal risk assessments and identify client categories where compliance costs are high relative to revenue
3. Rather than investing in enhanced KYC/AML procedures for individual accounts, the bank decides to exit the category entirely
4. Affected clients receive account termination notices, often with limited explanation and short timelines
5. Those clients attempt to find banking elsewhere, but as more banks adopt the same approach, options narrow until formal banking access disappears

The Profitability Calculation

The U.S. Treasury's 2023 AMLA De-Risking Strategy identified profitability as the primary driver. Correspondent banking, for instance, is a low-margin business. When banks weigh the revenue from a correspondent relationship in a developing country against the cost of ongoing due diligence, transaction monitoring, and potential enforcement actions, the arithmetic often favors exit.

This calculation is compounded by what regulators call "reputation risk": banks fear that maintaining relationships with certain client types could attract regulatory scrutiny, negative media attention, or enforcement actions, even if the specific accounts are fully compliant. The risk of being associated with a compliance failure, however remote, outweighs the business case for the relationship.

The Cascade Effect

De-risking creates a cascading chain of exclusion. When a major international bank exits a corridor, the local banks that depended on that correspondent relationship lose their connection to the global financial system. Those local banks may then de-risk their own client base, dropping money service businesses and remittance operators. The remittance operators, in turn, can no longer serve the individuals and small businesses that depend on cross-border payments.

The Scale of the Problem

Data from the Bank for International Settlements (BIS) shows that active correspondent banking relationships declined by approximately 30% between 2011 and 2022. The impact has been concentrated in the regions that can least afford it:

Pacific Island Countries maintained approximately 1,200 correspondent banking relationships a decade ago. Roughly 700 of those have since disappeared. Several sovereign nations now rely on a single correspondent banking partner, creating critical points of failure for entire economies.

Remittance Corridors Under Pressure

The human cost of de-risking is most visible in remittance corridors. Remittances account for 40% of Tonga's GDP and at least 10% for all Pacific Island Countries. When correspondent banks exit these corridors, remittance fees spike: Pacific corridor fees average 10%, triple the UN Sustainable Development Goal target of 3%.

Somalia provides a stark example. Remittances totaled roughly $1.4 billion in 2015, supporting 23% of the country's GDP and exceeding annual humanitarian aid. When Merchants Bank of California ceased operations in February 2015, it cut off one of the last U.S. banking options for Somali diaspora remittances, threatening the financial lifeline of millions.

De-Risking and the Crypto Industry

Digital asset companies have been particularly affected by de-risking, facing systematic exclusion from the banking system through both market forces and regulatory pressure.

Operation Choke Point and Its Successors

The original Operation Choke Point, launched by the U.S. Department of Justice in 2013, targeted third-party payment processors facilitating transactions for categories the DOJ deemed high-risk. The DOJ issued approximately 60 administrative subpoenas to banks between February and August 2013. The program was terminated in August 2017.

The crypto industry experienced what many termed "Operation Choke Point 2.0" beginning in 2022. Between March 2022 and May 2023, the FDIC sent letters to nearly two dozen banks asking them to "pause all crypto asset-related activity." These letters were revealed through FOIA litigation brought by Coinbase in 2023, with documents released in December 2024.

The consequences were immediate. Silvergate Bank, which operated the Silvergate Exchange Network (SEN) as a 24/7 crypto settlement layer, announced voluntary liquidation on March 8, 2023. Four days later, on March 12, 2023, New York regulators closed Signature Bank, which had offered its own crypto settlement network called SigNet. Signature's closure was the third-largest bank failure in U.S. history at the time. The combined loss removed two of the crypto industry's most critical banking partners.

Regulatory Pushback

International regulators and national agencies have increasingly recognized that blanket de-risking undermines both financial inclusion and anti-money laundering goals.

FATF Guidance

FATF has stated unequivocally that blanket de-risking is not consistent with its Recommendations. In its 2016 Guidance on Correspondent Banking Services, FATF clarified several important points: its Recommendations do not require correspondent banks to conduct due diligence on the individual customers of respondent institutions, due diligence should be commensurate with the degree of risk identified, and banks should explore all options before terminating a relationship. FATF has warned that de-risking can actually increase money laundering risk by pushing financial flows into unregulated, informal channels.

U.S. Regulatory Reforms

The OCC issued Bulletin 2014-58 stating that banks should assess risks posed by each MSB customer on a case-by-case basis and that the OCC "does not encourage banks to engage in the termination of entire categories of customers." The Bank Secrecy Act does not require blanket exclusion of any lawful business category.

More recently, the regulatory landscape has shifted substantially. In August 2025, Executive Order 14331 ("Guaranteeing Fair Banking for All Americans") directed federal banking regulators to remove "reputation risk" from guidance and examination materials. In April 2026, the OCC and FDIC jointly issued a final rule (effective June 2026) that codifies this prohibition, barring agencies from criticizing banks based on reputation risk or encouraging account closures based on lawful business activities.

The Remaining Gap

These regulatory changes prohibit agencies from pressuring banks to de-risk, but they do not require banks to serve any particular customer or industry. Banks retain full discretion over their private business decisions. The underlying economics that drive de-risking (high compliance costs relative to account revenue) remain unchanged, which means regulatory reform alone may not reverse the trend.

Stablecoin Rails as an Alternative

One of the most significant developments in addressing de-risking is the emergence of stablecoin payment rails that bypass correspondent banking entirely. Because stablecoin transactions settle directly between parties on a shared ledger, they eliminate the need for the chain of intermediary banks that traditional cross-border payments require.

The Republic of the Marshall Islands provides a concrete example. Facing severe correspondent banking constraints (with international USD wires costing four to five times the global average), the government issued USDM1, a dollar-denominated sovereign obligation backed 1:1 by U.S. Treasury instruments and issued on the Stellar blockchain. The government launched a digital wallet called Lomalo to distribute payments directly to citizens, bypassing traditional banking requirements entirely.

The passage of the GENIUS Act in July 2025, the first U.S. federal law creating a comprehensive regulatory framework for payment stablecoins, has further legitimized this approach. By providing regulatory clarity, it reduces the ambiguity that drove much of the de-banking behavior toward crypto companies.

Why It Matters

De-risking sits at the intersection of financial regulation, inclusion, and innovation. For developing countries, it can sever economic lifelines. For crypto companies, it can mean inability to operate despite full legal compliance. For the global financial system, it creates a paradox: measures intended to prevent illicit finance can push legitimate transactions into opaque, unregulated channels where they become harder to monitor.

Protocols like Spark that enable stablecoin transfers on Bitcoin infrastructure offer a path forward: payment rails that provide the transparency and auditability regulators want, without depending on the correspondent banking relationships that de-risking has eroded. As the traditional banking system continues to contract in underserved markets, blockchain-based alternatives are filling the gap.

Risks and Considerations

Legitimate Risk Management vs. Blanket Exclusion

Not all account closures constitute de-risking. Banks have legitimate reasons to exit individual relationships: customers who fail due diligence, accounts with suspicious activity patterns, or businesses operating outside their risk appetite. The problem arises when these decisions are made categorically rather than individually. Distinguishing between prudent risk management and blanket de-risking is often difficult from the outside.

Regulatory Whiplash

The regulatory environment around de-risking has swung significantly. Banks that de-risked under one administration's implicit encouragement now face scrutiny under another administration's reforms. This inconsistency can make financial institutions more cautious overall, as they cannot predict which approach future regulators will favor.

Alternative Channels Carry Their Own Risks

When formal banking channels close, money still moves. Remittances shift to hawala networks, informal couriers, or unregulated digital channels. These alternatives may serve the immediate needs of senders and receivers but lack the transaction monitoring and compliance controls that the formal system provides. De-risking can therefore be self-defeating: by trying to reduce risk, banks push activity into channels with no visibility at all.

This glossary entry is for informational purposes only and does not constitute financial or investment advice. Always do your own research before using any protocol or technology.