By Adrian Orr*
Now is the time for New Zealand banks to act with courage to keep banking services, including money remittances, to the Pacific Islands open.
The scale and complexity of the challenges facing Pacific Island countries are significant, including climate change and the severe economic impacts of Covid-19. With international travel and trade disrupted by the pandemic, many Pacific Island countries are facing tough times.
That means the economic importance of Pacific people in New Zealand being able to send money back to their home countries through remittances and maintaining financial corridors and services into the South Pacific countries continues to grow.
New Zealand bank boards and chief executives need to show courage by supporting banking services and remittances with the ultimate goal of a stable, prosperous and resilient South Pacific region.
We believe that courage is displayed by a bank when it provides essential financial services through good times and bad, as one would expect from any trusted long-term partner. The Reserve Bank expects that banks manage and mitigate risks rather than simply avoid them. Anti-money laundering laws are not an excuse to “de-bank” or “de-risk” from the Pacific Islands.
The Pacific Islands are generally lower risk countries – in fact the Australian to Pacific remittance corridor was assessed as presenting a low risk of money laundering and terrorism financing according to AUSTRAC, the Australian Government agency responsible for detecting criminal abuse of the financial system.
At the same time, the Reserve Banks of New Zealand, Australia, Fiji, Papua New Guinea, Samoa, Solomon Islands, Timor Leste, Tonga, Vanuatu, and others are working together on developing a regional ‘know your customer’ facility, to help support remitters and other businesses in meeting their compliance obligations.
Withdrawal of correspondent banking services and ‘de-risking’ of remittance service providers is making it harder and more expensive for Pacific peoples to access banking services and send money back to their home countries.
What is “de-risking”?
‘De-risking’ refers to the trend of financial institutions deciding to avoid, rather than to manage operational and compliance risks by ending business relationships with entire regions or classes of customers. As well as impacting on money remittance services, this practice has impacted on the withdrawal of correspondent banking relationships in the South Pacific region which could lead to a disproportionate effect on the region.
In an extreme case, a near-complete loss of correspondent banking relationships could severely limit a nation’s access to the global financial system. That could curb basic payment and currency exchange transactions which allow for remittances and trade, and could push remittances towards more unregulated and risky options, increasing financial system risk.
What is Correspondent banking?
Correspondent banking is the provision of banking services by one bank to another and withdrawal of these relationships has been accelerating in the Pacific. This is of concern to the Reserve Bank as correspondent banking is an important means of facilitating cross-border movements of funds, and enabling financial institutions to access financial services in different currencies and foreign jurisdictions. These correspondent banking relationships support international trade, commerce and remittances flows, all of which contribute to promoting access to necessary and affordable financial services in the Pacific.
Why remittances are critical for the Pacific
New Zealand banks should recognise the importance of providing and retaining financial services provided to the region and keeping remittance corridors open and cost effective between New Zealand and the Pacific Islands. Pacific Island countries are some of the most remittance-reliant jurisdictions in the world. For instance, World Bank data shows remittance as a share of Tonga’s GDP is approximately 40%, while for Samoa it is 17% and for Fiji 7%, with New Zealand one of the main sources of these funds.
The Reserve Bank is working with other government agencies in New Zealand, Australia, the Pacific and internationally to make remittances more accessible, safe and cost effective.
New Zealand banks have key roles in ensuring these remittances corridors remain open. These range from having a banking network in the Pacific, providing banking services to businesses who provide remittance services to and from the South Pacific and providing correspondent bank relationships and foreign currency accounts to other banks operating in the South Pacific region.
The Reserve Bank asks New Zealand banks to make supporting Pacific Island countries and their economies a strategic priority. We call on New Zealand banks to consider ways to make a positive difference to the region.
The RBNZ acknowledges and commends a range of bank-led initiatives that have taken positive steps towards supporting the South Pacific region. These initiatives, alongside constructive engagement with banks on South Pacific related issues and initiatives, are very encouraging. However, the RBNZ’s view is that more could be done.
*Adrian Orr is the Governor of the Reserve Bank of New Zealand.