The United States is seeking to strengthen its banking ties with several international
allies in response to China’s growing financial presence in the Pacific. As a growing number
of western banks continue to withdraw from this region altogether in line with the growing
global movement towards “de-risking”, various government agencies have warned of the
destabilizing effects that such a practice can have on the health of global financial system
should it continue unimpeded. Growing significantly in prevalence over the past decade,
this phenomenon is characterized by financial institutions terminating or restricting
business relationships with clients and even entire groups of clients – often in
impoverished regions or those affected by international sanctions – in order to avoid
potential risk. Given today’s complex regulatory environment, financial institutions
themselves are at elevated risks for repercussions from federal regulators for non-
compliance with current legislation as well as for failures to monitor and adjust to ever-
updating global sanctions and watch lists. As such, banks have additional incentive to shed
relationships that leave them susceptible to financial penalties or sanctions in their own
right.
De-risking has developed into something of a no-brainer for financial institutions –
especially those boasting total assets in the hundreds of billions and trillion-dollar ranges –
seeking to avoid potential issues arising. The continued adoption of this practice both
domestically and abroad has however created a dangerous situation that has severely
limited the economic growth of lesser-developed countries in the Caribbean, Africa, and
South America in particular to date, areas that rely heavily on their correspondent banking
relationships (CBR’s) to uphold their respective economies. It has also limited the ability of
low-income countries to receive global remittance payments which serve as a critical
lifeline for millions of people around the world who are in dire need of financial support.
Given the scope of these developments, a lasting impact on the respective financial
system’s of many individual countries has already been experienced, with the practice also
decreasing the gross strength of international connections found between financial service
providers. Making matters worse is that de-risking by financial entities has contributed to
growing financial crime risks and “black market” trade activity in these areas, with their
effects often extending across international borders. On the other end of the spectrum,
many smaller-scale financial institutions have actually accepted the banking accounts being
shed by larger institutions, opening themselves up to even more risk as illicit funds now
flow more freely in these neglected countries.
All told, correspondent banking relationships in the Pacific have declined at twice the rate
of the global average, with the de-risking practice severely limiting access to the U.S. dollar
in the region while also reducing American influence compared to China – the United
States’ chief economic rival. To better address the growing issue, this past week U.S. and
Australian officials met in Brisbane to discuss improving financial connectivity in the
region, this as foreign policymakers met to discuss potentially bolstering banking services
for China. Australia is being viewed as the preeminent mediator between the U.S. and China
in these relations, with Australian Assistant Treasurer Stephen Jones compounding his
country’s interest in becoming the “partner of choice” in the Pacific for banking or defense.
“We would be concerned if there were nations operating within the region whose principle
objective was advancing their own national interest as opposed to the interests of the
pacific island nations,” Jones said on the first day of the two-day Pacific Banking Forum
when questioned about China filling the void. 1
Brian Nelson, the U.S. Treasury’s Under Secretary for Terrorism and Financial Intelligence
also spoke at the event, choosing to focus his speech more on strengthening banking bonds
than actually taking on China however. “Correspondent banking has helped to bolster
international trade by reducing financial friction and allowing for quick and low-cost
transactions across borders”, said Nelson. He continued, “At the macro-level,
correspondent banking has facilitated large-scale foreign investment, including financing
for infrastructure and development projects, while also helping countries make their
financial systems more resilient.” 2 Nelson did not downplay the role of de-risking in
weakening banking bonds in the Pacific however. He added, “De-risking – and the
weakening of international financial ties more broadly – can impede financial access and
inclusion for significant populations, drive financial activity into unregulated financial
systems, inhibit investment and trade, and undermine financial stability and resilience.” 2
Nelson also seemed aware of the irony that the Biden Administration has been pushing the
de-risking trend hard as part of the President’s National Illicit Finance Strategy, which has
contributed its fair share to this growing international problem. However, he affirmed that
the Biden Administration remains committed to stay the course. “I know that many of the
people and countries represented in this room are no strangers to the damage done by de-
risking. In line with the principles set out by President Biden and Prime Minister Albanese,
we recognize and are committed to addressing bank de-risking across the Pacific. We share
the concerns that Pacific Island countries are experiencing among the most serious declines
in correspondent banking relationships in the world.” 2
While the U.S. and Australia both failed to release any specific details on the potential
expansion of their partnership in this regard, Reuters writes that the bulk of their
discussions come as Western nations who have traditionally held sway in the Pacific grow
increasingly concerned about China’s regional influence, this as Beijing continues to sign
major defense, trade and financial agreements in the region. 1 All told however, Nelson and
U.S. Treasury Secretary Janet Yellen both reaffirmed the U.S.’s continued efforts to address
de-risking and promote widespread financial inclusion. Yellen stated “The United States is
committed to an Indo-Pacific that is free and open, connected, prosperous, secure, and
resilient. A strong and connected Pacific region has benefits for the United States and for
the global economy.”
Citations
- Craymer, Lucy, and Lewis Jackson. “US, Australia Commit to Better Pacific Banking as China Influence
Grows | Reuters.” Reuters, 8 July 2024. - “Remarks by under Secretary for Terrorism and Financial Intelligence Brian Nelson at the Pacific
Banking Forum.” U.S. Department of the Treasury, 7 July 2024.
