Chapter 2Views on the bill
2.1This chapter considers inquiry participants’ evidence on the Pacific Banking Guarantee Bill 2025 (the bill).In general, inquiry participants expressed support for the bill to address concerns regarding the decline of the correspondent banking services in the Pacific region. Some inquiry participants considered the bill could impact on banking competition.
2.2The chapter concludes with the committee’s views and a recommendation.
The decline of correspondent banking services in the Pacific
2.3Pacific region countries have experienced an acute decline in access to correspondent banking services. This is a serious problem as many Pacific region countries rely on correspondent banks to facilitate a wide range of essential economic and commercial activities.
2.4In giving evidence to the committee, the Department of Foreign Affairs and Trade (DFAT) outlined the debanking problem in the Pacific region:
The phenomenon of fragile and smaller markets gradually losing their banking connections is worldwide but is most acutely felt in the Pacific. If you look at the statistics of corresponding banking relationships to the Pacific over the last 10 to 15 years, they've been in quite serious decline, and, in the most extreme example, at least two countries in the Pacific have come very close to losing all banking links. This has been something the region has been very concerned with. They have raised it both with us bilaterally and multiple times in the Pacific Island Forum.
2.5Further, DFAT noted that maintaining banking links in the Pacific region is ‘essential for financial connectivity, trade, remittance flows and for basic social services’. Despite this, it is an ongoing challenge for banks to operate in the Pacific region due to small market size, high regulatory complexity and lower capital returns than may be achieved in other jurisdictions.
Support for an Australia banking in the Pacific region
2.6There are several benefits of maintaining an Australian banking presence in the Pacific region, with evidence from inquiry participants’ highlighting the importance of sustaining banking links in the region provided by Australian banks.
2.7For instance, the Australia Pacific Islands Business Council, the Australia Papua New Guinea Business Council and the Australia Fiji Business Council (the Australia Pacific Business Councils) emphasised the importance of Australian bank operations to support, and give confidence to, Australian businesses operating in the Pacific region. In their joint submission, the Australia Pacific Business Councils said they support the bill as it ‘represents a commitment by the Commonwealth to provide support to Australian banks to maintain Australian banking arrangements in the Pacific which is essential for Australian business and is in Australia’s broader interests’. Further, the Australia Pacific Business Councils described the bill as a:
…critical piece of policy infrastructure for maintaining an effective Australian financial presence in the Pacific and supporting continuing Australian business engagement in the Pacific, and to support a properly functioning financial services structure in the Pacific.
2.8At the committee’s public hearing, Mr Francis Yourn, Executive Director of the Australia Pacific Business Councils, expanded on the important role Australian banks have in facilitating Australian business activity, and that of donor agencies, in the Pacific region:
For business to operate effectively in the Pacific it needs a strong, well-organised and reliable banking sector. Australian business does hundreds of millions of dollars worth of business in the Pacific in trade, in goods and in services, particularly around infrastructure development. Most funding for that comes from donor governments and multilateral donor agencies. All of it needs to go through banking systems that are reliable somewhere in the Pacific or based out of Australia. The presence of Australian banks in the Pacific is critical for Australian business to operate confidently there, and Australian business operating in the Pacific is a critical part of Australia's whole-of-government presence there as well.
2.9As such, the Australia Pacific Business Councils considered that the bill should be passed to ‘give Australian businesses confidence that banks are going to be there in the long run’.
2.10Furthermore, the Australia Pacific Business Councils told the committee that there could be further adverse impacts if Australian banks do not maintain a presence in the Pacific. For instance, the Australia Pacific Business Councils submitted that:
The presence of credible full-service Australian banks in the region creates opportunities for commercial transactions to be supported by various well founded financial instruments which would not be the case if the credible Australian banks are not present.
2.11Mr Yourn explained that many Pacific banks do not have the same level of capability to offer correspondent banking services as Australian banks do. In cases where Pacific banks ‘have lost their correspondent banking arrangements’ those banks have found it very difficult to support international financial transactions. Mr Yourn added that the options to work around such financial service limitations can result in bank customers, and the banks themselves, facing anti-money laundering risks.
2.12The Australia Pacific Business Councils also cautioned that if the role currently performed by Australian banks ‘were left to other Asian regional banks we would expect exports and two way trade would flow more and more from those other regions’.
ANZ Bank’s operations in the Pacific region
2.13In March 2024, the Australian Government entered into an agreement with Australia and New Zealand Banking Group Limited (ANZ) to support the bank’s continued operations in the Pacific region. The agreement is contingent on the bill passing into law.
2.14In giving evidence to the committee, ANZ outlined its long-standing operations in the Pacific region. ANZ currently operates in the following Pacific region countries: Fiji, Papua New Guinea, Samoa, Vanuatu, Tonga, Solomon Islands, Timor-Leste, Kiribati and the Cook Islands.
2.15ANZ told the committee that it’s ‘one of the largest providers of both banking and correspondent banking services across the region'. ANZ has over 100 correspondence banking relationships in the Pacific and the bank facilitates ‘about 25 per cent of all payments into the Pacific and around 15 per cent of all payments out of it’. Further, ANZ’s operations in the Pacific include:
over $5 billion of deposits and over $2 billion in loans;
a quarter of a million customers; and
over 1200 employees with $65 million in annual wage and salary costs.
2.16Further, ANZ told the committee that its presence in the Pacific supports its customers to benefit from growing trade and investment opportunities, including by supporting tourism and the movement of people in the region. ANZ added that its presence in the Pacific region also assists other banks:
While we don't provide US dollar clearing, our partner banks do, and this allows our retail and commercial customers to access our correspondent bank network and make international payments.
Regulatory challenges of operating in the Pacific
2.17As with other witnesses, ANZ noted the significant decline in correspondent banking services in the Pacific region. Ms Sarah Stubbings, Regional Executive for ANZ’s Pacific operations, told the committee that a 2024 World Bank report found ‘correspondent banking relationships in the Pacific have dropped 60 per cent over the last decade, compared to a global average of 30 per cent’.
2.18Ms Stubbings considered there were two main reasons for the decline in correspondent banking services in the Pacific region:
(i)that bank returns in the Pacific have been challenged over the last decade due to high capital requirements, more expensive technology and stronger competition. Further, the Pacific region has smaller economies and with complex business conditions; and
(ii)that financial crime regulation is now more important, with stronger laws and enforcement requirements. Banks do not want to get financial crime wrong and there have been higher expectations from correspondent banks in this regard.
2.19Combined, Ms Stubbings said these ‘pressures mean that high-cost and high-risk countries that don't offer scale are less attractive for banks to serve. While the Pacific is not unique in facing this challenge, it is an area that is badly affected by it.’
2.20ANZ’s evidence to the committee further detailed the regulatory complexity faced by banks operating in the Pacific region, particularly when operating across various Pacific region countries. Ms Stubbings explained:
Every bank that operates across the Pacific has to meet the relevant regulatory standards of each country in the Pacific. All the banks in the Pacific—ANZ, Westpac, BSP, Bred Bank—have to operate relative to the standards of the relevant regulator in each Pacific country they are in—so that plays out. But, because we're an APRA regulated entity, as is Westpac, we have to also then overlay any APRA regulatory requirements in terms of the amount of capital we have to hold, relative to our exposures in the Pacific.
2.21Further, the committee heard that as an AA- rated bank, ANZ must retain this rating across all the countries it operates in in the Pacific. Ms Stubbings noted that fellow Australian bank, Westpac, would be in a similar situation for its operations in the Pacific. However, Ms Stubbings explained this same regulatory standard does not apply to other local banks in the Pacific:
Other banks who operate in the Pacific—local banks or those who operate across the Pacific—are not AA-rated banks. That means we have to bring the standards that we have in Australia and New Zealand to the Pacific. That creates significant complexity for us. We manage across nine different regulatory and legal frameworks that are relatively low scale and high risk, particularly from a financial crime and KYC environment.
2.22ANZ’s evidence to the committee also detailed the business challenges and costs of responding to financial crime issues in the Pacific region. The committee heard that there had been a number of previous financial crime issues in Pacific region countries. Further, Ms Stubbings told the committee that related challenges in the Pacific region include people not having required identity documents and central banks not having the same capacity to monitor financial crime compared to other jurisdictions. As such, Ms Stubbings said there are significant costs for ANZ to appropriately manage financial crime issues in its banking operations, but that doing so is critical for its customers and other banks that deal with ANZ Bank to facilitate payments for Pacific region countries.
ANZ Bank’s agreement with the Australian Government
2.23Noting the challenges of operating in the Pacific region, ANZ told the committee that the bank was pleased to enter into an agreement with the Australian Government to support its banking operations in the Pacific.
2.24In its submission, ANZ outlined the agreement with the Australian Government as follows:
Under this arrangement, the Australian Government will provide a limited guarantee to ANZ in connection with its current Pacific operations for 10 years. The maximum amount of the guarantee is AUD$2 billion. The guarantee includes an annual fee payable by ANZ to the Australian Government.
As part of the arrangement, ANZ will invest a further $50 million in its Pacific banking systems to enhance our digital banking offering and support ongoing operations in the region. We have also committed to maintaining our existing fee-free offering for International Money Transfers made via ANZ retail digital channels into the Pacific over the life of the guarantee, to help support the flow of funds and remittances into the region.
2.25Further, ANZ told the committee that, under the agreement, the bank’s public commitments are to:
Maintain access to banking services, including face-to-face services (where relevant) in the: Cook Islands; Republic of Fiji; Republic of Kiribati; Independent State of Papua New Guinea; Independent State of Samoa; Solomon-Islands; Democratic Republic of Timor-Leste; Kingdom of Tonga; and Republic of Vanuatu.
Support access to international money transfers (payments) and correspondent banking services, including in USD, AUD and NZD.
Maintain fee free remittances from Australia and New Zealand for ANZ customers made via ANZ Internet Banking and the ANZ App.
Support Pacific countries through infrastructure financing that is in line with ANZ’s credit risk policies.
Continue to promote and grow ANZ’s financial inclusion and literacy program in the Pacific.
Invest an additional AUD50 million to enhance its digital banking offering in the Pacific (excluding in Papua New Guinea) and support ongoing operations in the region.
2.26In its evidence to the committee, the Treasury summarised the details of the agreement as follows:
In terms of the commitments that the Commonwealth has secured from ANZ, we've secured a 10-year commitment across all of the markets that ANZ is currently operating in the Pacific to maintain face-to-face banking services, including digital services; supporting their ongoing access to correspondent banking, which…is a high priority for Pacific Island countries; a $50 million investment in digital banking; and continuing their work on promoting financial inclusion and literacy, as well as looking to support countries with their infrastructure financing programs as well.
2.27Further, ANZ told the committee that ‘[t]he guarantee covers certain eligible liabilities and is only triggered if certain trigger events occur and result in a direct loss for ANZ’. The guarantee will have the effect of reducing the amount of regulatory capital required to be held by the bank and help to ‘address the commercial sustainability of remaining in the Pacific’.
2.28Due to commercial sensitives associated the agreement, the committee agreed to a request from ANZ to hear certain evidence on the particulars of the agreement in camera.
Transparency of guarantee details
2.29Some evidence to the committee raised concerns around the lack of details on the operation of guarantees.
2.30Bank South Pacific (BSP) emphasised its difficulties assessing the likely impacts on competition in the region given the confidential nature of individual guarantee agreements. BSP told the committee that it had recently engaged with Treasury, but did not gain a greater understanding of the of the nature of the guarantee arrangements.
2.31In light of these difficulties, BSP recommended the Australian Government conduct ‘ongoing transparent consultation with regional banks regarding any future guarantee arrangements’. Ms Nuni Kulu, BSP Group Chief Operations Officer explained:
The inclusion of regional banks in future policy design and consultation is critical for the stability, resilience and prosperity of our South Pacific communities.
2.32Mr Glenn Skarott, BSP Group Chief Financial Officer, called for better visibility and understanding of the impacts of guarantees or other incentive. He emphasised:
Consultation is important. Prosperity across the Pacific is something that we are entwined with, and we think that we've got a lot to offer in terms of consulting and coming up with plans to make the Pacific more prosperous. We welcome supporting the Australian government on that.
2.33Whilst expressing strong support for the intent of the bill, and for the Government ‘taking proactive steps to provide financial connectivity and stability in the Pacific’, the Pacific Island Forum Secretariat similarly commented on a lack of clarity on some aspects of the bill, noting ‘exactly what is to be guaranteed is vague being “related to the ADI’s banking business in the Pacific region (including conducted through its subsidiaries)”’.
2.34The Pacific Island Forum Secretariat remarked that it is not clear from the stated objectives of the bill—to guarantee against ‘the unlikely possibility of default in the region’—what types of losses would be captured. They further noted that the negotiating parameters for the guarantees under this bill are unspecified.
2.35The committee was further advised by the Pacific Island Forum Secretariat that the Explanatory Memorandum offers no evidence as to why the risks of the guarantees are low and guaranteed amounts are likely to be small.
2.36Mr Tim Baird, Assistant Secretary, Banking and Credit Branch, Treasury, told the committee that a broad range of options were considered to address the objectives of this bill including, for example, direct subsidies. He explained:
Our advice on this arrangement was that this was the lowest cost, lowest risk way to achieve the objective, rather than providing direct funding or for the Australian government to look to provide the services themselves, for example. There is a whole gamut of options that you could consider, but our view was that this was the lowest cost, lowest risk way of addressing the issue.
Uncapped and open-ended appropriation
2.37The bill creates an ongoing and uncapped appropriation.
2.38The Explanatory Memorandum states ‘the appropriation is not time-limited to provide the Commonwealth with the flexibility to enter into guarantees of varying duration with ADIs’. The EM also states that the special appropriation does not have a direct dollar-figure limit allowing ‘the Commonwealth flexibility to negotiate with ADI’s on the terms and amount of any guarantee’.
2.39BSP raised concerns about the open-ended and uncapped nature of the appropriation. A report by Lateral Economics, provided in support of BSP’s submission explained:
While the commitment to ANZ has been capped and is time-limited, there is nothing in the current Bill that ensures this for future guarantees. Such provisions expose Australian taxpayers to potential financial risks that have not been adequately quantified or safeguarded against (discussed below). Essential safeguards, including financial caps, defined timelines, and robust oversight mechanisms, would be desirable.
2.40The committee asked Treasury to clarify the appropriation conditions and was advised by Mr Baird that it is quite common for special appropriations to be uncapped. He reflected that, in this case, it would provide flexibility for future arrangements with banks.
2.41Mr Baird explained that ‘one of the disadvantages of the approach of providing a specific number is that it could anchor future negotiations with banks’. By way of example, Mr Baird explained:
If the government were to approach one of the other Australian banks and offer a guarantee, and if they were aware that there's currently a $2 billion guarantee with ANZ and, let's say, for argument's sake, a $10 billion cap, then they would recognise that there's $8 billion available.
2.42The EM explains that the appropriation is:
…strictly limited to the policy objective of supporting banking in the Pacific region and any guarantee provided by the Commonwealth would be subject to a specified dollar-limit.
2.43The committee also heard from Treasury officials that, although the special appropriation does not have a direct dollar limit, ‘there is obviously a maximum amount on the guarantees and the Commonwealth would not provide an unlimited guarantee’.
2.44The committee also heard the risks were assessed using commercial advice and internal stakeholders including Department of Finance to arrive at a ‘very low’ assessment. Ms Claringbould, Acting Senior Advisor in Treasury’s Cross-Sector Regulation, Redress and Resilience Branch, confirmed the Commonwealth doesn’t bear the full risk of the guarantee.
Fee details
2.45In his second reading speech the Treasurer stated that ‘[e]ligible Australian banks will pay a fee to the Commonwealth for the guarantee, it is not a subsidy’.
2.46Some evidence to the committee argued that a lack of transparency of those proposed fees created risks. BSP, for example, submitted concerns that the guarantee’s apparent design lacks a defined fee, or ‘principles by which a fee could be set that is commensurate with the risk the Commonwealth is taking on its balance sheet’. BSP stated:
…it is unclear whether the fee is for the guarantee or whether there is a fair exchange of value between the bank and the Commonwealth.
2.47BSP’s supporting report by Lateral Economics elaborated on these concerns:
…we note the uncertainty regarding what the Commonwealth will charge for the guarantee. At a minimum, the PBG legislation should require the Commonwealth to charge a fee that is commensurate with the additional risk taken onto the Commonwealth balance sheet.
The appropriate benchmark for the Commonwealth to charge would be the cost the private sector would charge to bear the risk, since a higher charge would create an unfair playing field for other operators.
2.48When asked why certain elements of the guarantee would be treated as commercial in confidence, Mr Baird advised:
Primarily, it would hamper the government's ability in terms of future negotiations if information such as fees or liabilities were in the public domain. That is very commercially sensitive information not just in relation to this specific piece of legislation but in relation to any government negotiations with other parties on guarantees, for example.
2.49Mr Baird further explained that he would expect the term and amount of future guarantees would be publicly available but conceded that conditions around what information will be disclosed or will remain commercial in confidence are not included in the legislation.
Impact on other Pacific region projects
2.50The Pacific Island Forum Secretariat also expressed concerns about how guarantees might interface with the World Bank funded Pacific Strengthening Correspondent Banking Relationships (CBR) Project. It submitted that:
...the guarantees potentially serve to underwritewhat the CBR project is aiming to do (and could encourage Australian registered banksto apply), but secondly, on the other hand, could make it more complicated in thatAustralia might underwrite CBR/banking operations for the bigger markets (withAustralia registered banks), but might not offer guarantees for the smaller markets (withlocal banks) thereby reducing the expected economies of scale for the project's CBRproviders to smaller markets.
Competition impacts
2.51While supporting the intent of the bill, some inquiry participants raised concerns that the bill could potentially have a negative impact on Pacific region banks that are not party to a Pacific bank guarantee with the Australian Government.
2.52BSP outlined that it is the largest and most widespread bank in the South Pacific region, with approximately 2 million customers, 4600 staff and operations across Papua New Guinea, Fiji, Solomon Islands, Samoa, Tonga, Cook Islands, and Vanuatu.BSP accounts for approximately half of total deposits (52 per cent share) and lending (49 per cent share) in the South Pacific.
2.53BSP submitted concerns about potential adverse impacts of the bill on the market share and financial position of local Pacific banks in addition to indirect economic and social impacts. It advised:
Any measures that distort the market or affect our resources could have direct consequences for maintaining regional services, ensuring accessible and secure banking and driving the digital transformation that the South Pacific urgently needs. Policies or guarantee regimes set to exclude locally headquartered banks undermine competition, innovation and our capacity to deliver and expand essential banking services
2.54In particular, BSP noted the bill risks creating competitive distortions and diminishing the presence of local banks such as BSP.It submitted that:
While the specific terms have not been disclosed, we understand that the guarantee reduces regulatory capital requirements for eligible banks’ Pacific operations – a benefit not extended to locally based Pacific banks such as BSP which are not headquartered in Australia.
2.55BSP raised concerns that the guarantee:
could allow recipient banks to adopt a more aggressive market stance;
may also enable recipients to utilise actual or perceived benefit of being backed by the Australian Government in marketing efforts;
risks compounding the significant cost advantages Australian banks already hold relative to local banks in the South Pacific;
would result in a significant loss of market share to Australian domiciled banks;
may ‘inadvertently delay the emergence of more resilient local credit ecosystems in the South Pacific’;
may adversely impact regional governments and the broader community if local bank viability is threatened and results in reduced workforces.
2.56Reflecting on modelling prepared by Lateral Economics, BSP observed ‘[t]he fact that we don't know what the guarantee is, required assumptions to be made. BSP explained to the committee:
…the assumptions were based on ANZ not requiring as much capital for their Pacific operations. Not requiring as much capital effectively means that their funding costs would not be as high, and, therefore, they could price their loan products differently.
2.57In response to the committee’s questions, Mr Baird advised that, in Treasury’s view, the assumptions in the Lateral Economics modelling attached to the BSP submission were not accurate.
2.58Noting that it largely competes with ANZ in lending to the corporate sector, BSP conceded that:
As long as there's no commercial advantage to ANZ that impacts our ability to compete fairly, we'd have no concerns.
2.59Addressing the competition concerns, Mr Baird explained to the committee that:
The guarantee has been carefully designed to be non-distortionary, and it's not expected to impact competition in Pacific Island banking markets. The purpose of the guarantee—and I think ANZ has covered this in their evidence—is to release regulatory capital in Australia. Pacific banks are not required to hold regulatory capital in Australia for their Pacific operations. The guarantee in effect places ANZ on the same level footing as banks operating in the Pacific today.
Committee view
2.60The committee welcomes the opportunity to examine the Pacific Banking Guarantee Bill 2025. The committee notes that the bill provides a mechanism for the Australian Government to provide support, by way of a limited guarantee at a fee, for Australian banks to continue operating in Pacific region countries.
2.61The committee supports the Australian Government’s efforts to maintain correspondent banking services in the Pacific region. Banking is an essential service and—given the unique challenges of maintaining banking operations in the Pacific and the acute decline in correspondent banking services—the committee considers it appropriate that the Australian Government works to support access to banking services in the Pacific.
2.62In particular, the benefits of maintaining an Australian banking presence in the Pacific region are manifest. As raised in inquiry participants’ evidence, correspondent banks underpin economic and commercial activity in Pacific region. They provide comprehensive banking services, which may not be feasible for local banks in the Pacific region, and facilitate financial connectivity with the rest of the world, including Australian businesses and donor agencies with significant interest in the Pacific.
2.63Of course, Australian Government support for commercial banking operations in the Pacific region must be carefully designed to ensure that the use of consolidated revenue funds maximises Australia’s national interest and does not cause competition issues in the Pacific banking market.
2.64To this end, the committee recognises that Bank South Pacific (BSP) has raised concerns that the guarantee may cause market distortions. However, the committee is assured by evidence from the Department of the Treasury, the Department of Foreign Affairs and Trade and from ANZ, that the likely impacts of the bill do not reflect the assumptions in modelling undertaken by BSP and Lateral Economics.
2.65Indeed, Treasury’s evidence to the committee is that the scheme has been carefully designed to be non-distortionary. The committee is also assured by Treasury’s analysis that the Pacific banking guarantee proposed by the bill is the lowest cost, lowest risk way to achieve the objective of the bill.
2.66Further, the committee does not consider it appropriate for Australian taxpayers to guarantee non-Australian banks that aren’t subject to Australian regulatory frameworks and therefore does not support broadening the guarantee to banks that are not Australian-headquartered ADIs.
2.67On balance, the committee considers that the bill does not provide an undue benefit for Australian banks, like ANZ, beyond what is otherwise needed to secure their continued operation in the Pacific region. Furthermore, the committee considers that the bill will have considerable positive impacts on facilitating payments in the Pacific region, encouraging commercial activity and bolstering the important relationship between Australia and its Pacific region neighbours.
2.68The committee recommends that the Senate pass the bill.
Senator Lisa Darmanin
Chair
Labor Senator for Victoria