Tisha Shah | South Pacific Fellow
Secretary of State Antony J. Blinken participates in the U.S.-Pacific Islands Forum meeting at the APEC House in Port Moresby, Papua New Guinea on May 22, 2023. Image sourced from U.S. Department of State via Wikimedia Commons.
Pacific Island countries (PICs) are at significant risk of facing financial disruptions and inequitable access to banking services as the threat of debanking by Western financial institutions in the region rises. Now more than ever, the development of strong regional financial infrastructure and multilateral economic resilience-building initiatives is crucial to counteract the declining availability of core financial services in the Pacific.
Debanking, also known in the sector as derisking, refers to the withdrawal of banking services from a nation or region due to risk and profit based concerns. As a region that is heavily reliant on correspondent banking relationships (CBRs) – wherein domestic banks partner with international counterparts to enable international payments and transactions – derisking not only has individual and firm-level impacts, but hinders the ability to process trade, investment and foreign aid payments in and out of PICs.
The rise of derisking
While there has been an international decline in CBRs, the Pacific Islands in particular have been disproportionately more vulnerable, with CBRs’ falling by over 60 per cent in the last decade; almost double the average global decrease of 30 per cent.
This has been attributed foremostly to geographic factors. The region’s dispersed population across a large surface area generates significant administrative and service provision costs, limiting the ability of such services to be provided en masse. Furthermore, the complexity of navigating each nation’s financial landscape and regulatory environment in the face of limited profitability has increasingly disincentivised Western banks from engaging in the region. The low returns offered by service provision in the region deters Western banks from undertaking costly due diligence requirements imposed predominantly by Australian the US legislation.
Issues with combatting the threat of financial crime have in particular been a significant driver of debanking. The current infrastructure in the Pacific is not well placed to mitigate the risks that can foster an environment for increased financial crime. For example, difficulties with ensuring that Pacific Islanders have sufficient documentation to prove their identity to the extent required by banking regulations has led to their being estranged from accessing financial services.
The increasing use of PICs as hotspots for money laundering and organised financial crime has created the additional burden of ensuring compliance with anti-money laundering and anti-terrorism requirements – pushing banks further away.
Debanking disrupts growth in the region
The mass withdrawal of banks from the region has significant domestic impacts. Without CBRs, the cost of banking transactions has risen significantly, decreasing the accessibility of already limited financial services in the Pacific. The resulting effects could include a transition of commercial transactions from regulated, reputable institutions to informal and potentially exploitative means of banking.
The ability of Pacific nations to process trade and humanitarian payments from other nations, which are often central to development and productivity, would also be debilitated. The withdrawal of Bendigo Bank from Nauru by the end of 2024, for example, has left the nation’s cross-border banking services in a precarious position. Without a replacement, Nauruan’s will have to resort to solely cash payments and use formal remittance providers to engage in international transactions – causing significant disruptions to the efficacy and equity of financial services.
The increased cost of service provision has particularly had profound consequences on remittance payments. Many Pacific Islanders are highly reliant on support payments by relatives working overseas, with such transactions making up almost 50 per cent of GDP in some Pacific states. Many already vulnerable groups in the region could be further disenfranchised if this trend continues.
Current multilateral mitigation strategies
The long-term ramifications of debanking on the financial stability of the Pacific have demonstrated the urgency of intervention through both domestic and international channels.
Ideally, empowering PICs to bolster their financial services sector independently would enable the greatest autonomy and minimise dependency on the West or other development partners.
The Pacific Island Forum has significant potential to unify PICs in tackling derisking. It has sought support from the World Bank to investigate and invest in bolstering regional banking infrastructure. Upon conclusion of its review, the Bank pledged $68 million in grant and credit funding to support 7 PICs to remain integrated in international banking system if their CBRs are too volatile. It has also been providing support to assist in overhauling the current regulatory framework to create universal national payment systems and improve anti-money laundering and counter-terrorism protections. If utilised effectively, such universalised measures can counteract the complex geographical administration issues faced by foreign banks.
Multilateral collaboration with development partners can also improve confidence in the long-term stability of the banking sector. As the region’s primary financial trading partners, both Australia and the United States have also sought to establish comprehensive multilateral strategies to hedge against the risks of debanking. The Pacific Banking Forum, established by the Biden and Albanese administrations, has enabled PICs and their partners to develop strategic roadmaps out of the debanking crisis. Its first iteration in July 2024 made notable inroads, with Australia delegating $6.3 million to help mitigate the effects of derisking, and regulatory authorities across the US, Australia and New Zealand committing to overseeing PIC efforts to strengthen banking regulations.
The future of financial services in the Pacific
Pacific leaders have repeatedly emphasised the importance of regional solutions and streamlining legal and regulatory processes amongst Pacific states. In the face of significant economic volatility and vulnerability to exogenous shocks, the Pacific and its partners must seek to implement universalised regulation of financial services and organised financial crime, and sturdier frameworks to nip debanking in the bud.
Tisha Shah is the South Pacific Fellow for Young Australians in International Affairs. She is a fourth-year Bachelor of Law (Honours) and Bachelor of Economics student at the Australian National University, with a keen interest in the intersections between policy, economics and social justice advocacy.
Tisha is excited to investigate the South Pacific as an increasingly central region to international discussion, and to explore the complex nature of gender, security and climate issues within various Pacific nations. She is keen to study Australia’s continually evolving role as a key development and regional partner to the Pacific.
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