Syndicated lending to Bahrain fell 33% between 2010 and 2015, comparable to the decline it sustained in the 2007–2008 financial crisis. Bahrain was not sanctioned; its exposure followed from proximity to Iran, which faced another round of sanctions in 2010. This figure shows how a chokepoint can be produced by over-compliance rather than by sanctions: banks decline transactions that the sanctions permit, with the affected states unable to use standard diplomatic means to address this.
A study of cross-border loans between 31 lending and 182 borrowing countries around the 2010 Iran sanctions puts figures on the pattern. Lending to Iran’s neighbours fell by 11% to 14%, and lending to states politically aligned with Iran by 10% to 12%. Neither group was designated. The two channels, proximity to the target and political alignment with it, operate inside bank compliance systems rather than in the sanctions instruments themselves.
That contraction is only part of the picture. The same study shows that banks headquartered in the five major conduit centres (the Netherlands, the United Kingdom, Switzerland, Singapore, and Ireland) moved in the opposite direction, raising lending to Iran’s neighbours by 32% and to politically aligned states by 33%. No sanction prohibited either group from lending to these jurisdictions. That two sets of lenders facing the same legal position moved in opposite directions is what identifies the contraction as a risk decision rather than a legal requirement. The increase covered 13% and 15% of the respective shortfalls. Total credit still fell materially, and the composition of what remained shifted toward less transparent institutions in less scrutinised jurisdictions.
The pattern is not confined to Iran. A March 2025 policy brief from the Royal United Services Institute (RUSI) records the same response to Executive Order 14114, issued in 2023, which authorises secondary sanctions on foreign financial institutions facilitating transactions that support Russia’s military-industrial base. This means that a non-US bank processing a payment for a designated Russian entity risks losing access to US dollar clearing. The asymmetry in that calculation is priced. Average penalties for sanctions violations have risen in the last two decades, from around $125,000 in the 2000s to about $29m under the Obama administration, with five actions above $1bn between 2010 and 2020. The risk of severe penalties makes over-refusal a rational option for banks, as declining a lawful transaction carries no comparable exposure.
The Retreat of Correspondent Banking
Over-compliance is the acute form of a slower process. Correspondent banking, the arrangement by which a local bank reaches the global payment system through an account held at a larger foreign one, has been contracting for more than a decade. The driver is the cost of financial-crime compliance rather than sanctions designations. When asked why correspondent relationships ended, 37% of respondent banks in emerging Europe said the business no longer justified the due-diligence cost and 32% pointed to tightened anti-money-laundering enforcement. Only 3% cited weaker customer demand. The 2014 penalty against BNP Paribas is another identifiable shock, accelerating a withdrawal already underway. Across eastern Europe, active correspondent relationships fell 34% between 2011 and 2022.
The two processes compound. A jurisdiction that has already lost most of its correspondent relationships has no buffer when a sanctions episode triggers over-compliance among the lenders that remain, and the cost lands on the real economy through trade finance. Four years after their bank lost correspondent services, firms in the affected countries were 19.8% less likely to be exporting at all, and those still exporting earned 57% less from it. Higher domestic sales absorbed only part of the shortfall, leaving lower total revenue and employment. Dissolution rates ran two and a half times higher. The effect concentrates among small and medium-sized exporters.
Regulatory Guidance and Enforcement Incentives
Neither the entities list nor improved implementation guidance is the operative lever. Guidance from the Office of Foreign Assets Control operates at the level of interpretation, while the incentives that produce over-refusal and de-risking sit at the level of enforcement penalties and cost-benefit analysis, which interpretive guidance is unlikely to adjust. A recent analysis of the international financial governance regime approaches the problem from a different direction and reaches a compatible conclusion: enforcement pressure has compelled banks to withdraw from entire countries and regions. The arrangement that results leaves a strategic public function in the hands of private compliance departments whose incentives have not been adjusted to match.
That study is concerned with the erosion of the governance regime rather than with compliance incentives specifically, and its conclusion is about reach rather than relocation: geopolitical intervention drives finance out of visible, regulated spaces into opaque ones, thereby shrinking the effective regulatory perimeter. The US Treasury’s 2023 de-risking strategy concedes that widespread de-risking undermines the centrality of the US financial system, but proposes no corrective mechanism at the level of enforcement incentives, which is where the behaviour originates.
The Durability of the Effect
No single actor operates this chokepoint. It is the aggregate of many private risk decisions, each rational against the enforcement incentives facing the institution that makes it. The practical consequence for firms and policymakers is that the removal of a designation does not restore access. Correspondent relationships, lending patterns, and trade finance capacity do not return on their own, and the jurisdictions and firms least able to absorb the loss are the ones carrying it. Renminbi settlement through China’s Cross-Border Interbank Payment System has so far made limited headway. The enforcement architecture nonetheless continues to expand the number of firms and states with a reason to seek an alternative, which is the condition under which such systems become viable.
