Pacific islands are being ‘debanked’. What does it mean – and why are Australia, NZ and the US concerned?

The withdrawal of major banks from Pacific islands poses significant socio-economic risks to the region, prompting intervention by Australia, the US and New Zealand.

The so-called debanking of the Pacific – when banks close or restrict accounts because they believe customers pose regulatory, legal, financial or reputational risks to their operations – was the focus of discussions at this week’s Pacific Banking Forum in Brisbane.

Australian Prime Minister Anthony Albanese and US President Joe Biden announced the forum last year to deal with growing concerns about the loss of correspondent banking relationships in the Pacific.

Correspondent banks provide banking services to other financial institutions overseas.

For example, a person in Vanuatu might want to send money to someone in Australia, where their local bank may not operate, so another Australian bank will facilitate the transaction on behalf of the Vanuatu bank.

While these relationships have declined globally in the past decade, the fall in the Pacific has been particularly steep. Between 2011 and 2022, the region lost about 60% of its correspondent relationships.

These relationships are significant because, among other things, they enable domestic banks to make and receive international payments. When foreign trade payments cannot be made, trade is threatened.

Also, many Pacific communities rely on money remitted by family members working overseas. In 2022, remittance receipts amounted to 44% of the gross domestic product (GDP) in Tonga, 34% in Samoa and 15% in Vanuatu.

Yet the value of these remittances is eroded by banking costs that consistently rank among the highest globally. In the fourth quarter of 2022, the average remittance cost in the Pacific was 9.1% of the transaction value – more than triple the global target of 3%.

Why is the Pacific facing a debanking crisis?

The provision of banking services in the region is challenged by the vast distances and small populations of Pacific Islands.

Foreign bankers also have to navigate different laws, regulations and risks of each jurisdiction. While general crime risks may be relatively low in the region, organised crime is increasing.

Money laundering laws require bankers mitigate financial integrity risks relevant to each jurisdiction and Business relationship. This adds to the complexity and costs of each banking relationship. In some cases, bankers respond to this risk by terminating or limiting the relationship.

Pacific Islands such as the Marshall Islands are left with one bank and it is expected it might also close.

While other Pacific Islands – including Samoa, Tonga and Tuvalu – may have a higher number of banking relationships, some services have been limited or are provided at a higher cost.

Why the US, NZ and Australia are involved

This week’s Pacific Banking Forum, co-hosted by the Australian and US governments, drew together a wide range of debanking stakeholders.

Officials of governments, central bank governors, regulators, domestic and foreign bankers and representatives of international financial institutions and the Pacific Islands Forum joined to consider the drivers of debanking and potential solutions.

In his keynote address at the forum, Australian Treasurer Jim Chalmers pointed to the importance of these services for local communities as the reason why his government has

been actively talking to all the major Australian banks to let them know how important a continued Australian banking presence in the region is to the government.

Forum speakers also recognised the benefits of Healthy and resilient cross-border correspondent banking relationships.

In her video remarks to the forum, US Secretary of the Treasury Janet Yellen noted that correspondent banking

promotes healthy market competition in the financial services sector; facilitates trade financed through regional and global financial centers; enables financing for infrastructure and development projects; and helps to make economies and financial systems more resilient to shocks.

Positive change

The Pacific debanking tide may be turning. In 2023, the Pacific Islands Forum commissioned and adopted a debanking study of the World Bank. They also adopted a roadmap of actions informed by the study to make correspondent banking more resilient in the region.

Discussion about the problem now involves Australian, New Zealand and US banks and their regulators. US, Australian and New Zealand dollars are key trade currencies for Pacific jurisdictions and correspondent banking services are important to the economic Health of the region.

At the Brisbane forum, a number of Pacific representatives acknowledged the problem of scale in the Pacific and spoke in favour of regional solutions, aggregation of transactions and greater consistency of laws and processes.

International bankers and regulators, on the other hand, positioned the need for compliance with global anti-money laundering standards and the benefits of improved national identification systems, digital identity and appropriate Technology.

While definitive solutions will take time to implement, the World Bank is considering a regional solution that will support temporary access to correspondent banking services if a country loses its last banking service in a key currency.

This will provide the relevant jurisdictions with access to appropriate services while they secure services by another correspondent bank. Such a facility will ease the immediate pressure on the Pacific and allow time for more sustainable solutions to be developed and implemented.

The Australian treasurer also pledged A$6.3 million in funding to secure digital identity infrastructure in the Pacific, improve compliance with global anti-money laundering standards and help build criminal justice and law enforcement capacity in the region.

It is important cross-border banking systems are open, secure and inclusive. The discussions this week in Brisbane may mark a return to a more resilient, re-banked Pacific Island community.