It’s a problem that could cripple economies and threaten livelihoods across the Pacific.

Some Western banks have been getting out of the region, and Australia fears a full-blown exodus in coming years.

It’s not just that some banks are shutting up shop. The financial architecture that allows money to flow into and around the region is also under serious strain.

So what are the problems? What can governments, banks and financial institutions do to fix them?

And what might the consequences be if they can’t find an effective solution?

What is the problem? 

If you’re in the Pacific, getting access to banking services often isn’t that straightforward — and it could soon become worse.

First, accessing bricks and mortar branches is becoming an issue. Some Australian banks appear to be edging away from the Pacific.

For example, Australia’s Bendigo Bank has announced it will withdraw from Nauru next year — a move that risks leaving the small Pacific nation without a bank.

Unlike other Australian banks, ANZ has long maintained a major presence across the Pacific.

But in recent years it too has sold off assets in Papua New Guinea, closed 10 branches across the region and exited both American Samoa and Guam.

Westpac was also trying to sell its Pacific businesses in PNG and Fiji, before abruptly cancelling that plan last year.

But the main problem goes deeper, and beyond the simple question of bank closures.

Correspondent banking relationships are already in steep decline across the Pacific.

These ties are critical because they allow banks that don’t have a physical presence in the Pacific to provide services via those banks that do, facilitating wire transfers, business transactions and deposits.

But between 2011 and 2022, the Pacific lost about 60 per cent of its correspondent banking relationships, making it much harder for those in the region to make transactions in international currencies.

That figure is even higher if you look at services denominated in US dollars, with Western banks cancelling a staggering 80 per cent of all their correspondent relationships with Pacific institutions.

That means critical transactions and payments rest on a dwindling number of key commercial relationships.

If all these trends continue, then more people in the Pacific could soon struggle to access affordable banking services.

It could also make it even more expensive for Pacific Islanders to send and receive remittances for work done overseas, which is already not a cheap exercise.

That would present a massive problem for Pacific families and governments which rely heavily on those payments to stay financially afloat.

In Fiji, for example, remittances soared to a record high $F1.25 billion ($853.5 million) in 2023, more than 20 per cent above the year before, making it the second-largest earner for the country behind tourism.

Other difficulties could also crop up quickly. 

Pacific governments would struggle to access payments from overseas governments — including development funding of relief payments — without major delays. Financial activity could quickly shift to informal or black market channels.

It would also mean businesses would struggle to make cross-border payments, dealing a hit to trade and exports — something the Pacific can ill afford right now during its fragile post-pandemic recovery.

So, why are the big banks getting out?

It’s complicated. But banks point the finger at two main problems.

The first one is that the Pacific markets are small (and therefore not very profitable) but can still be quite difficult to operate in because they’ve each got their own set of specific rules and regulations.

Last month a host of bankers and officials from Australia, the United States and the Pacific gathered in Brisbane to talk about the challenges facing the region’s banking.

The chief executive of ANZ, Shayne Elliott, gave a fairly blunt and candid account of how his bank saw the landscape, saying that doing business in the Pacific could be “complex”.

“Each country has its own laws, regulations, customs and tax,” he said.

“While it’s important that each country charts its own course, this can create costs for businesses that want to operate across the region.”

The second problem is that some countries, particularly the US, have introduced tougher financial crime regulations globally to crack down on things such as money laundering and terrorism financing.