One bank’s risk control is another bank’s — and financial ecosystem’s — financial Armageddon.
Reuters reported on Monday (July 18) that large banks seeking to stanch volatility may eye dialing back on risk exposure, but the implications to smaller firms operating in smaller countries could suffer.
As noted by IMF Managing Director Christine Lagarde in a speech presented to the Federal Reserve Bank, larger firms may be on the hook for smaller firms, which may display “systemic” dangers. The key is to maintain correspondent banking relationships.
Lagarde pushed for a bit more cooperation from bigger firms, as she is “concerned that all is not well in this world of small countries with small financial systems. In fact, there is a risk that they become more marginalized.”
Some smaller economies have seen trouble and are indeed vulnerable to a shock-producing event. Countries where remittance is favored need the following: space, organization and maintenance of their corresponding banking relationships. Vigilant eyes and continuous attention will keep disruptions manageable.
Companies with strong compliance operations, spanning security and money laundering, for example, have the tools in place to deal with larger firms and their struggle with onerous capital requirements, Lagarde said.