“The message we are sending today to the entire Pacific family is clear – you can bank on us.” So declared Australia’s Treasurer Jim Chalmers earlier this year at the Pacific Banking Forum held in Brisbane.
His pledge on behalf of the Australian government comes amid a regional banking crunch, where international lenders are deserting Pacific Island economies, with one exception – China.
Over the past decade, financial institutions have dropped 60 per cent of their correspondent banking relationships (CBRs to employ the jargon) – double the global average. For every five banks exiting the Pacific, four are Western (providing services in US dollars).
CBRs facilitate international trade and allow Pacific Island countries to receive aid money and remittances, attract investment, and grow their economies. As Chalmers said, “At stake here is the ability of the Pacific to engage with the world.”
International services are being cut because profits are diminishing in the Pacific due to rising compliance costs and concerns about financial crime. This is also a region with no economies of scale, an incapacity to monitor financial crime, and inconsistent rules around international money transfers. It makes the business case for banking in the Pacific a difficult one to sell to shareholders in Australia and the United States.
But not in China. In Papua New Guinea and Vanuatu, the Bank of China (BoC) looks set to open new branches, and there could be more.
The concern for Canberra is that, as regulation demands from Australia and the United States increasingly price Pacific Island nations out of the global financial system, they’ll become riskier places to do business, reinforcing financially instability and further opening an avenue for China to provide a service that Australian banks won’t.
China’s not the only one to be expanding financial services into the Pacific while others withdraw. No new branches appear to be on the cards, but over the past decade France’s banking cooperative BRED Bank opened offices in Fiji, Vanuatu, and Solomon Islands, building a regional strategy for growth and market share. As with China, France’s infrastructure program in the Pacific is growing, rationalising the business case for the presence of its financial institutions.
In response to Australia’s potential desertion of the regional banking system, Chalmers announced a deal will be landed with the Australia and New Zealand Banking Group (ANZ) to secure the bank’s presence in nine Pacific Islands. The details are yet to be released, however the deal reportedly doesn’t include subsidies or direct payments to ANZ. Underwriting of risks is one possibility, such as offsetting the challenges of operating across many jurisdictions, each with its own anti-money laundering (AML) laws, know-your customer regulations, customs and tax. The government might also help facilitate cooperative financial crime efforts.
Another possibility is that the Treasurer is backing ANZ to be the contracted provider to the World Bank. In September, the multilateral institution announced that it will subsidise a provider to offer international services to seven at-high-risk Pacific Island countries soon to lose their last CBR in a key currency. Part of the Australian deal could include adjusting the settings for ANZ to operate with reduced liability in these risky environments while it plugs the CBR gap. The World Bank is also offering to bring development partners together, to strengthen compliance and regulatory frameworks while building scale via regional aggregation of transactions so the business becomes more profitable – a key sale point for ANZ’s shareholders.
One thing is certain: the deal will aim to keep Pacific communities and economies connected to Australia’s, not just for the benefit of Pacific Islanders, but to counter the emergence of China in this sector in the absence of an Australian partnership.
In the meantime, PNG’s banking problems are immediate. As the largest Pacific economy, PNG has less than a year to strengthen its anti-money laundering processes before being put back on the “grey-list” by the intergovernmental Financial Action Task Force, which would impose stricter financial conditions and monitoring on its financial system. At the same time, money laundering risks will rise, with PNG’s first casino due to open next year in a special economic zone allowing fast-tracked immigration, tax and customs processes.
Other Pacific Island nations at high risk of losing banking relationships include Fiji, Samoa, Solomon Islands, Tonga and Vanuatu. The Marshall Islands for example faces losing its only foreign bank because of rising compliance costs, and Nauru’s only bank (an Australian one) is expected to exit the country in just seven months’ time. With Nauru using Australian currency, the potential to change to the Chinese yuan would concern Canberra, especially after the BoC and Nauru signed a memorandum of understanding last year.
All these problems for Pacific Island nations – both immediate and long-term – point to the ongoing need for the Australian Treasury to internationalise its portfolio, both to advance Australia’s interests in the region and help Pacific nations secure their economic future.
Originally published by the Lowy Institute.
