In a powerful message to the Pacific nations, Australian Treasurer Jim Chalmers recently proclaimed, “The message we are sending today to the entire Pacific family is clear – you can bank on us.” This pledge highlights Australia’s commitment to safeguarding the financial ties between its own economy and the Pacific Islands, amidst a growing banking crisis in the region.
The Regional Banking Crisis: Western Banks Retreating
Over the past decade, many international financial institutions have pulled out of the Pacific, with Western banks leading the exodus. Correspondent banking relationships (CBRs), which facilitate international trade, remittances, foreign aid, and investment, have been slashed by a staggering 60% — twice the global average. The result is a significant loss of access to vital financial services in Pacific Island economies. For every five banks pulling out of the Pacific, four are Western banks that offer services in US dollars, which are crucial for global trade and financial transactions.
The reduction in CBRs has far-reaching implications for the region. Without these banking links, Pacific Island nations face challenges in engaging with global markets, receiving aid, attracting foreign investment, and growing their economies. Treasurer Chalmers succinctly put it: “At stake here is the ability of the Pacific to engage with the world.”
The Drivers Behind the Banking Crunch
The retreat of Western banks from the Pacific can be attributed to a combination of economic and regulatory challenges:
- Rising Compliance Costs: Banks operating in the Pacific face high regulatory burdens, especially regarding anti-money laundering (AML) and counter-terrorism financing rules. These costs make it increasingly difficult for banks to justify maintaining operations in the region.
- Financial Crime Risks: The Pacific Islands face challenges in monitoring financial crime due to limited infrastructure and inconsistent regulatory frameworks. This adds to the perceived risk of doing business in the region, which discourages banks from maintaining correspondent banking relationships.
- Lack of Economies of Scale: The small, dispersed populations and the limited business opportunities in many Pacific Island nations make it difficult for banks to achieve the scale necessary to operate profitably.
These factors make it hard for the Pacific Islands to remain connected to the global financial system, further exacerbating their vulnerability.
The Chinese Alternative: A Growing Presence in the Pacific
While Western banks are pulling back, China has stepped in to fill the gap. The Bank of China (BoC) is expanding its presence in the Pacific, with plans to open branches in Papua New Guinea and Vanuatu. This move raises concerns in Canberra, as China’s growing financial influence in the region could potentially undermine Australia’s strategic interests. The Bank of China is not the only player; France’s BRED Bank has also made significant investments in the region, opening branches in Fiji, Vanuatu, and the Solomon Islands.
The concern for Australia is that as its regulatory requirements push Pacific nations out of the global financial system, China’s financial services may become the default option, potentially increasing Beijing’s political and economic leverage over these small island nations.
Australia’s Response: Securing the Pacific Banking Link
In response to the regional banking crisis and the potential for China to fill the void left by Western banks, Treasurer Chalmers has announced a deal to secure the Australian and New Zealand Banking Group (ANZ) as the key banking provider in nine Pacific Island nations. While the details of the deal are still under wraps, it’s clear that Australia is seeking to maintain its financial and economic influence in the region.
This deal could include underwriting risks for ANZ, helping the bank manage the regulatory complexities and compliance challenges that come with operating across multiple Pacific Island jurisdictions. Additionally, it’s possible that the Australian government may back ANZ’s bid to become the World Bank’s contracted provider in the region, ensuring that the bank can offer international services to countries that are at risk of losing their last correspondent banking relationships.
The goal of the agreement is twofold:
- Ensure Pacific nations remain connected to Australia’s financial system: This will not only help secure the region’s economic future but also keep Australia’s strategic influence intact.
- Counter China’s growing presence: As China expands its banking services, Australia’s efforts are designed to maintain a competitive edge and prevent Pacific Island nations from becoming financially dependent on Beijing.
Urgent Banking Challenges in Papua New Guinea and Other Pacific Islands
The need for a solution is urgent, particularly in Papua New Guinea (PNG), the largest economy in the Pacific. PNG is at risk of being placed back on the “grey-list” by the Financial Action Task Force (FATF) due to deficiencies in its anti-money laundering framework. If this happens, PNG’s financial system will face stricter conditions, making it even more difficult to maintain correspondent banking relationships.
Several other Pacific Island nations, including Fiji, Samoa, Tonga, Vanuatu, and the Solomon Islands, also face the threat of losing their banking relationships due to rising compliance costs and the increasing complexity of international money transfers. For example:
- The Marshall Islands is on the verge of losing its only foreign bank, which would significantly disrupt its ability to engage in international trade and receive aid.
- Nauru, which relies on the Australian dollar, is also at risk of losing its sole bank, an Australian institution, in just seven months. This would leave the country vulnerable to China’s growing influence, especially after the Bank of China signed a memorandum of understanding with Nauru last year.
These financial disruptions underscore the urgent need for Australia to act in the Pacific, not just for the benefit of its island neighbours, but to ensure its regional influence is not eroded by China.
Australia’s Strategic Interest in Pacific Banking
The ongoing banking crisis in the Pacific presents a complex set of challenges for Australia. While the country faces pressure from rising compliance costs and regulatory hurdles, it must remain engaged with the region to protect its financial and strategic interests. By partnering with ANZ to secure the financial infrastructure in the Pacific, Australia aims to counter China’s growing influence and maintain strong economic ties with its Pacific neighbours.
The deal with ANZ is an important step in ensuring that Pacific Island nations can continue to access the global financial system. However, the situation remains fluid, with the outcome of Australia’s efforts still uncertain. What is clear is that Australia’s future in the Pacific depends on its ability to adapt to the changing financial landscape and maintain its role as the region’s preferred banking partner.
