By Lewis Jackson and Renju Jose
BRISBANE (Reuters) -Australia on Tuesday pledged to boost investment in Pacific Island countries to support their financial systems, as banks cut ties to the region citing risk at a time when China is looking to increase its influence there.
Some Western banks have ended long-term relationships with their counterparts in small nations in the Pacific, while others have looked to close operations, limiting access to U.S. dollar-denominated bank accounts.
"We know the Pacific has seen the fastest withdrawal of correspondent banking services of any region in the world," Australia's Treasurer Jim Chalmers said in a speech at the Pacific Banking Forum in Brisbane.
"At stake here is the ability of the Pacific to engage with the world," he said, adding that large parts of the region risked being cut off from the global financial system.
Between 2011 and 2022, the Pacific region lost around 80% of its correspondent banking relationships in services denominated in U.S. dollars, Australia's Assistant Treasurer Stephen Jones told the forum, co-hosted by Australia and the United States.
Australia will provide A$6.3 million ($4.3 million) more for the Pacific to develop secure digital identity infrastructure and enhance compliance with anti-money laundering and counter-terrorism financing requirements, Chalmers said.
Western banks are de-risking to meet financial regulations, which has made it harder to do business in Pacific Island nations that are sometimes behind in compliance standards, in turn undermining financial resilience in these countries, according to experts.
Australian bank ANZ is in talks with the government about ways to make its business in the Pacific Islands more profitable, as the exodus of Western financial services fuels concern about rising Chinese influence, its CEO said on Tuesday.
ANZ is the biggest lender in the Pacific, with operations in nine countries, though some of those businesses are not financially viable, Shayne Elliott said in an interview.
"If we were there purely commercially we would have just shut it down," he said on the sidelines of the forum.
U.S. Treasury Secretary Janet Yellen said on Monday that Washington's focus was on supporting the Pacific's economic resilience, including through strengthening access to correspondent banks.
Western nations that traditionally have held sway in the Pacific have become increasingly concerned about China's plans to increase influence there after Beijing signed key defence, trade and financial deals in the region.
Bank of China signed an agreement with Nauru to explore opportunities there this year after Australia's Bendigo Bank said it would pull out of the country.
Chalmers said Australia was working with Nauru to ensure ongoing banking services in the country.
In recent years, ANZ exited retail operations in Papua New Guinea, while Westpac considered the sale of its operations in Fiji and Papua New Guinea but decided to keep them.
($1 = 1.4826 Australian dollars)