Banks Step Up Due Diligence on Non-Bank Borrowers

For banks, the ever-expanding push into global markets also has included a broadening of lending activities — to the tune of trillions of dollars.

In many cases, the party on the other side of the transaction tends to be a non-bank firm.

New guidance from global supervisors will mean that financial institutions (FIs) will have to have to sharpen and broaden the ways they conduct due diligence on those burgeoning relationships, and how they’re tracked on an ongoing basis. Data must be comprehensive, international and synthesized in automated fashion, so providers and platforms can help conduct deeper dives into compliance and security concerns at the point of onboarding.

On Wednesday (Dec. 11), the Basel Committee on Banking Supervision debuted new guidelines for managing counterparty credit risk.

That risk, broadly defined, is the risk that a party in a financial transaction entered into with the bank will default on their obligations at some time during the relationship. Defaults have a ripple effect: If a loan sours, and the counterparty is not able to meet their obligations — which brings capital to the bank’s balance sheets — there’s less capital “on the books” to lend out to other borrowers.

As reported in the document, the guidelines are geared toward helping manage the higher-risk relationships that come with being exposed to non-bank financial intermediaries, especially for relationships that are international in scope.

Where to Start

“The credit approval process should begin with a comprehensive collection and review of financial and non-financial information, including legal, regulatory, reputational and operational risk” for those NBFIs, the committee wrote, adding later in the document that “in some cases, the collection of financial statements alone is insufficient to assess the riskiness of a counterparty.”

Additionally, “banks may leverage upstream processes, such as those that may already exist in compliance and operational risk management frameworks (eg know-your-customer), to inform and drive assessments performed in the credit risk decision-making process.”

The Basel guidelines follow moves by the U.S. Financial Stability Oversight Council, which updated its own guidance on risk assessment. The issued updated guidance that calls for a new framework that would assess vulnerabilities and “transmission channels.”

The Federal Reserve estimated in a September paper that bank lending to nonbanks stood at about $2 trillion last year.

Streamlining the Process

Verification and data collection-focused platforms have been rolling out new features and raising capital to automate several functions tied to ascertaining the legitimacy of businesses and gleaning details on their operations.

In one example, risk management platform provider Coris raised $3.7 million in its first funding round as it has rolled out fraud and KYB offerings. Separately, Israeli identity verification firm AU10TIX has launched a know-your-business (KYB) solution earlier in 2024. The combined KYB/KYC solution checks against 200+ jurisdictions and more than 1000 government registries, the company said.

PYMNTS reported earlier this year that Markaaz has created a pre-populated directory of over 300 million businesses worldwide, covering firmographic, financial health and compliance attributes for all of them. It pulls from curated 65,000 global data sources and applies a proprietary matching algorithm and data stewardship to ensure that every attribute of the business identity is identified and accurate as they onboard and monitor businesses. The real-time data is accessible in real-time via application programming interfaces.