Purpose of the Bill

The purpose of the Pacific Banking Guarantee Bill 2025 (the Bill) is to ensure that Australian banks (Authorised Deposit-taking Institutions (ADIs) with their headquarters in Australia) continue to have operations in the Pacific region. In introducing the Bill, the Treasurer stated that it aims to help ensure Pacific nations have access to correspondent banking relationships which provide important connections to the global financial system. Commentators suggest that the Bill is also intended to counter moves by China in seeking to gain strategic footholds in the region by installing state-owned banks.

Background

Market conditions in the Pacific generally make it an unattractive region for foreign banks to operate in. There simply isn’t the scale and diversity of business in most locations and, with increasing costs related to ensuring compliance with anti-money laundering and anti‑terrorism financing laws, the region is seeing a withdrawal of correspondent banking relationships.

Australia relies on the correspondent banking relationships Australian banks offer for a number of types of cross-border transactions and other services, including remittances of money by employees working in Australia under the Pacific Australia Labour Mobility (PALM) scheme to their home countries, the provision of foreign aid, and trade.

The implicit objectives of the Bill are to foster positive relations between Australia and Pacific nations, whilst also helping to avoid ‘debanking’ whereby the vacancy left by Australian (and other Western banks) exiting the region could be filled by national interests not aligned with Australia’s.

To reduce the risk of ‘debanking’ in the Pacific (and, in particular, the decline in the availability of correspondent banking services) the Bill seeks to make conditions more favourable for Australian banks to operate in the Pacific. It does this by, in effect:

• allowing the Commonwealth to enter legally binding guarantees (Pacific banking guarantees) with ADIs that could act as a safety net for their operations in the Pacific
• ensuring that money from the Consolidated Revenue Fund (CRF) can be used to pay out funds to Australian banks under the terms of a Pacific banking guarantee.

This will allow the banks to mitigate the risks and constraints imposed by operating in the smaller markets that are features of the Pacific island economies.

The Pacific

The Bill defines the Pacific region as including:

• the islands of the Pacific
• Papua New Guinea (PNG) and
• Timor-Leste (clause 3).

The region defined in this way has a population of around 13.7 million, with 10.4 million in PNG, 2.3 million across the Pacific Islands, and 1.4 million in Timor-Leste.

The area of the Pacific can be described as home to 3 broad cultural groups – Melanesian, (Fiji,[1] PNG, Solomon Islands, Vanuatu), Micronesian (Federated States of Micronesia, Palau, Marshall Islands), and Polynesian (Cook Islands, Niue, NZ, Samoa, Tonga). Pacific nations possess significant natural resources, rich biodiversity, and unique linguistic and cultural features.

The Pacific also has challenges, including those faced by developing countries. For example, under the UN Sustainable Development Goals (SDGs), the framework for international development efforts, data for SDG 1 – No Poverty, show that for the Pacific, 1 in 4 live below the poverty line, with poverty characterised by lack of economic opportunity and social exclusion. Moreover, data for SDG 8 - Decent Work and Economic Growth show that a number of Pacific nations have restricted economic bases and, as such, are highly sensitive to external shocks, with this further exacerbated by internal employment factors including gender gaps and high youth unemployment/ underemployment.

Australia’s aid program

Australia’s official development assistance (ODA, or aid) program is designed to alleviate poverty, support economic development, and provide humanitarian assistance to developing countries. In the Pacific, developing countries include small island developing states who, due to their small population size, narrow resource bases, remoteness from international markets, and fragile land and marine ecosystems, are particularly vulnerable to economic shocks and to the impacts of climate change.

In 2023, the Government released Australia’s International Development Policy: For A Peaceful, Stable And Prosperous Indo-Pacific (IDP). The IDP blends aid functions with defence and security in response to non-democratic-state-actor interest in the region, and a sharpened understanding of the value of a free and open Pacific. Australia’s aid budget is very much focused on the Indo-Pacific. From the total 2024–25 aid budget of $4.96 billion, 66% is allocated to the Indo-Pacific ($3.31 billion), or 41% to the Pacific ($2.05 billion) and 25% to Southeast Asia ($1.26 billion).[2]

The Pacific Australia Labour Mobility scheme

Outside of Australia’s traditional ODA programs, the PALM scheme (a temporary migration program) operates with the following objectives:

• filling labour gaps in rural and regional Australia and nationally for agriculture and select agriculture-related food product manufacturing sectors by offering employers access to a pool of workers from 9 Pacific islands, PNG, and Timor-Leste when there are not enough local workers available
• facilitates Pacific and Timor-Leste workers to take up jobs in Australia, develop their skills and send income home (thus fostering development in their home countries)
• create strong links between people, businesses, and communities, fostering deeper connections between Australia, the Pacific and Timor-Leste.

At January 2025 there were 30,705 PALM workers in Australia benefiting eligible businesses and their home countries via remittances that in some case form large parts of Pacific economies. Countries participate in the PALM scheme by entering into a memorandum of understanding with Australia. Participating countries are Fiji, Kiribati, Nauru, PNG, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu and Vanuatu.

Data for September 2024 shows a total of 31,230 workers participating in the scheme. By country of origin, Fiji had 6,070 PALM scheme workers, with 80% of Fijian PALM workers in the long-term employment stream. From Tonga, there were 3,350 workers with 66% in the short-term stream. For Tuvaluans, there were 300 PALM scheme workers with 100% working long-term.

Importance of remittances to the Pacific[3]

Since 2015, for low and middle income countries (LMICs), remittances have comprised the largest source of external financial flows globally. Also, since 2000 remittances have surpassed the volume of global ODA and foreign direct investment flows to LMICs.

Using data on remittances as a percentage of GDP, Tonga tops the list globally, with Samoa 4th.

In 2022, remittances into Tonga comprised half of its GDP (49.9%). This dropped to 40.6% in 2023, however it remained the highest percentage of any country.[4]

This over-reliance on remittances can be problematic. For example, Tonga pays one of the highest rates for remittance transaction fees at 10%, which in 2021 cost the country $11 million in remittances from Australia, the highest incoming foreign currency remitted to Tonga, comprising 37.6% of remittances that year.

Turning to other Pacific countries, in 2022 Fiji received the highest amount of personal remittance funding by dollar value at US$394 million or around A$627 million.[5] The Reserve Bank of Fiji has reported that more than 60% of remittances to Fiji come from Australia, New Zealand, and the United States.

Another regional economy, Vanuatu, also receives a high dollar value in remittances with US$208 million in 2021. Vanuatu is also currently the largest contributor of workers to the PALM scheme.

Figure 1 shows personal remittances received as a percentage of GDP in Fiji, Tonga and Vanuatu. Between 2019 and 2022 (data not available for Vanuatu for 2023), all countries figures increased post-pandemic by roughly the same percentage, with Fiji’s figure growing by 4%, Tonga’s by 5%, and Vanuatu’s by 3%. However, when growth is measured as a factor of the 2019 figure, it shows Fiji increasing by 74%, Tonga by 14%, and Vanuatu by 20%.

Figure 1 Personal remittances received as a percentage of GDP in Fiji, Tonga and Vanuatu

Source: World Bank Personal remittances, received (% of GDP) - Fiji, Tonga, Vanuatu | Data

These are substantial growths in personal monies entering these countries via remittances from migrant workers and if they were to lose correspondent banking relationships this would become highly problematic.

Costs of remittances and the impact on Pacific nations

With high volumes of remittance flows into the Pacific, the main factors impacting on the costs of remittances is briefly examined. According to the World Bank, the cost-drivers of remittance fees include:

… underdeveloped financial infrastructure in some countries, limited competition, regulatory obstacles, lack of access to the banking sector by remittance senders and/or receivers, and difficulties for migrants to obtain the necessary identification documentation to enter the financial mainstream.

However, one of the most important factors leading to high remittance prices is a lack of transparency in the market. It is difficult for consumers to compare prices because there are several variables that make up remittance prices. Prices for remittances are frequently made up of a fee charged for sending a certain amount, a margin taken on the exchange rate when remittances are paid and received in different currencies, and, at times, a fee charged to the recipient of the funds. These fee components may also vary according to how the receiver is paid (i.e. cash or by crediting an account), the speed of the transfer, and the ability of the sender to provide information about the recipient (i.e. bank account number).

In addition, a lack of transparency in the market has had the impact of reducing competition, as consumers tend to continue to patronize traditional market players because they are not aware of and cannot compare services, fees, and speed of their existing remittance service against other products.

In relation to the cost-drivers of remittance fees, the International Monetary Fund has observed (p. 6):

Overall, our findings point to both cost- and risk-based constraints and market structure as barriers to lower remittance fees. Higher transaction costs as result of a more rural population in the sending country and lower scale can explain high remittance fees in some corridors. These structural factors indicate a limit to the extent to which remittance fees can be lower with policy actions. However, lower risks due to exchange rate stability and Internet rather than cash payment can reduce remittance fees.

On the other hand, remittance corridors dominated by banks and few players are characterized by higher fees. Linking these findings back to the above mentioned global policy objective of reducing remittance fees suggests that structural country factors might prevent a further drop in remittance fees, but that stronger competition, especially from non-bank providers, and digitalization might help reduce remittance costs. Similarly, exchange rate stability (or better hedging possibilities) might help reduce these costs.

The Bank for International Settlements also notes that other factors that impact on the price of remittances between countries includes the existence of a colonial relationship, a common language, a shared border, the distance between the sender and the receiver, whether the remittance is sent by bank or non-bank service providers, and the availability of digital remittance services (p. 4)

In the context of the cost of remittances sent to Pacific countries, relevant factors appear to include smaller, less diversified economies, lack of price transparency, lack of competition between remittance service providers, lack of digital financial services and reliance on cash in the Pacific.

The Pacific countries with high remittance flows are those with smaller and less diversified economies including Palau, Samoa, Tonga and Vanuatu. Pacific countries less reliant on remittances have more diversified economies including those with saleable natural resources, fisheries, and tourism, for example PNG and Fiji (p. 15).

The G20 has a target of no more than 3% for a $200 remittance by 2030, with no corridors with costs higher than 5% (p.10). The Lowy Institute reports the average cost of remittances in key Pacific Island countries with strong economic ties to Australia ranged between 9.3% to 14%. For example, remittances sent from Australia to Tonga were charged an average fee of 10% in 2021 which totalled $11 million.

A report by the Australian Competition and Consumer Commission shows the cost of international money transfers from Australia has decreased in recent years, but remains above G20 targets, with the Reserve Bank monitoring indicating ‘substantial scope’ to improve remittance costs, particularly to the South Pacific ‘where customers can face some of the highest charges for sending money back home’ (p.20).

Analysis of World Bank data by the Lowy Institute shows that if the UN target of transaction fees of less than 3% per transaction was applied to remittance costs, Fiji, Tonga, and Vanuatu would be better off by $79 million annually.

The risks of debanking in the Pacific

‘Debanking’ (or ‘derisking’ as it’s known in the banking sector) is the process whereby banks or other financial institutions exercise their right to deny banking services to individuals, businesses or countries. Debanking in the Pacific context is more accurately described as the process where ‘banks close or restrict accounts because they believe customers pose regulatory, legal, financial or reputational risks to their operations’.

Debanking can occur as a result of:

• compliance with anti-money laundering and counter-terrorism financing laws
• compliance with sanctions
• if there is a reputational risk for the bank or
• if it is unprofitable for the bank. (p. 2)

Causes of debanking in the Pacific region

In the Pacific, the rationale banks provide for debanking most commonly relate to the small market size, lack of profitability and high compliance costs that cannot be readily offset by economies of scale, due to each country having its own rules and regulations with which banks and businesses must comply.

Furthering the costs and complexities for banks are abovementioned financial crime laws. Operating in markets with both low profitability and also risk of illegal activity reduce appetites of commercial banks to enter or remain in such markets.

Other views on causes of debanking in the Pacific region

However, some of those outside the banking sector see the problem differently. At the Pacific Banking Forum, Chair of the PIF expressed frustration at onerous regulations imposed upon them by banks and foreign governments, with Cook Islands Prime Minister Mark Brown (the current chair of the Pacific Islands Forum (PIF)), stating that more needs to be done by Western governments and banks to help Pacific nations to find solutions.

In an Australia-Fiji Business Council article, Prime Minister Brown described the impact of rapid withdrawal of correspondent banking relationships for the region:

This withdrawal has significantly hampered local banks and communities from accessing cross‑border payment services, thereby inflating the cost of remittances and limiting access to development aid. [Moreover] the decline of correspondent banking relationships is a global issue affecting many developing economies, particularly the Pacific, leading to financial exclusion and restricting participation in global supply chains.

Impacts of debanking on Pacific region economies

Debanking is occurring in the Pacific at twice the rate of the global average (60% compared with 30%). Debanking leaves customers without access to correspondent banking relationships that connect them to the global financial system.

In summary, the impacts of debanking on Pacific region economies include:

• a decline in correspondent banking operations, potentially leading to increased costs and difficulties in making remittances to Pacific region countries
• increasing the difficulty in efficiently and cost-effectively accessing payments from overseas governments, such as disaster relief and humanitarian aid
• risks that more monies are transacted through informal or black-market channels
• creating difficulties for Pacific Island businesses in terms of making and receiving payments across borders, impacting trade and exports
• creating a self-perpetuating and accelerating cycle of increased costs and financial isolation if there continues to be a declining number of commercial relationships resulting in further increases to the costs of banking services in the Pacific, in turn impacting on countries who rely heavily on remittances and the countries in which they work, like Australia.

Geopolitics

In the same way Australia’s aid policy links development priorities with some of Australia’s defence and security interests, Australia may seek to ensure a significant Australian economic presence in the Pacific (and one that is important to the economies of Pacific nations), so that it may continue to have a positive impact on foreign relations with Pacific nations and also reduce the need for People’s Republic of China (PRC) state-owned banks to enter the market.

In 2019, 10 Pacific nations signed an economic cooperation agreement with China to support:

Chinese-invested banks in operating financial business and innovative financial products in Pacific Island countries.

In late 2023, 2 years after its attempts to sell off its bank in PNG were blocked by the PNG competition regulator, Westpac announced that it would retain its operations in PNG and Fiji, reportedly following messaging from the government that it would be desirable to retain its operations in the Pacific in the face of Chinese expansion in the region.

A 2022 fact sheet produced by the PRC’s Ministry of Foreign Affairs notes the long-lasting friendly relationships it has had with Pacific Island nations since the 1970s, and there is the well‑reported security pact agreement signed with the Solomon Islands in 2022. However, aside from its development partnerships in the Pacific through its Belt and Road Initiative (BRI), China’s presence in the banking sector in the Pacific has been limited to sporadic presence in PNG, and an MOU with Nauru (in relation to which Australia appears to have beaten the PRC to the punch by facilitating the Commonwealth Bank to take over operations with the departure of Bendigo Bank).

Commentators suggest that the Bill appears to be, at least partly, a policy response to growing geopolitical competition between the PRC and other nations for influence with Pacific Island nations. Australia has had a recent win, striking a deal with the ANZ providing them with a $2 billion guarantee to retain its Pacific branches.

Australian banks in the Pacific

The presence of Australian banks in the Pacific goes back over a century to the early 1900s with the ANZ and Westpac (and their earlier guises). Australian banks currently operating in the Pacific are:

• ANZ – Cook Islands, Fiji, Kiribati, PNG, Samoa, Solomon Islands, Timor-Leste, Tonga and Vanuatu
• Westpac – Fiji, PNG
• Commonwealth – Nauru (commencing in the 2nd half of 2025 following Bendigo Bank exit).

However, in recent years there has been a growing trend of banks exiting the region, along with debanking. Analysis by the Lowy Institute also shows that ‘for every 5 banks exiting the Pacific, 4 are Western (providing services in US dollars).’ Presently, there are moves by some Australian banks to remove their services from the Pacific.

In November 2023, Bendigo Bank announced it would be removing its services from Nauru by December 2024. However, when the state-owned Bank of China signed a Memorandum of Understanding with Nauru, the Australian Government worked with Bendigo Bank and the Commonwealth Bank to ensure continuity of service with Bendigo Bank delaying its departure until June 2025, at which point the Commonwealth Bank will take over banking services on Nauru, apparently with no financial contribution from the Australian Government.[6] This process has culminated in the Australian Government signing a treaty with Nauru that includes a significant component on banking (see Articles 3 and 5(6)).

The ANZ has been negotiating with the government to retain its presence in the region. The ANZ, which has a longstanding presence in the Pacific, had closed 10 branches since 2019, had been selling off assets in PNG, and had completely exited American Samoa and Guam. In late 2024, Treasurer Jim Chalmers announced that the government was close to finalising a deal with the ANZ to secure its presence in 9 Pacific nations, which analysis theorised at the time wouldn’t include subsides or funding to the ANZ, and positing options including the underwriting of risk for banks, which appears consistent with the provision of Pacific banking guarantees under the Bill.[7] The deal was finally brokered in March 2025.

On 14 March 2025, the ANZ reported that it has been offered a 10 year limited guarantee from the Australian Government to support its banking operations in the Pacific. The maximum amount of the guarantee is $2 billion, which the Australian Government says has a low probability of being called. It is unclear what this probability is based on. The ANZ will pay an undisclosed annual fee to the government. Under the guarantee agreement, the ANZ is required to invest an additional $50 million into its Pacific banks including for digital banking services and regular operations. ANZ has stated that it:

expects the guarantee to commence in the second half of 2025, following the commencement of legislation enabling the guarantee. [emphasis added]

Other methods that may support the intended aims of the Bill include adopting common laws, implementing consistent regulation, and enhancing anti-financial crime efforts, where Australia has its own strategy. Another example is the World Bank project whereby a contractor is provided a subsidy to support the provision of correspondent banking services to Pacific Island countries (PICs) who are facing the loss of their last correspondent banking relationships in a key currency. The aim of the program is that it ‘ensures continuity of financial flows to and from PICs until a more sustainable solution is in place’. The program also aims to bring together development partners to assist with compliance matters, and help develop a longer-term solution that ‘involves the regional aggregation of transactions to achieve scale and a clear market-driven business rationale’.

Pacific Banking Forum

Launched by US President Joe Biden and Prime Minister Anthony Albanese, the Pacific Banking Forum was held in Brisbane 8–9 July 2024 to address the urgent problem of debanking and the decline of correspondent banking relationships in the Pacific.

The Pacific Banking Forum supports the PIF, the key Pacific leadership body, which has already developed a CBR Roadmap that sets out actions and benchmarks for Pacific countries and development partners to address the decline of correspondent banking relationships.[8] The Banking Forum seeks to complement this by linking ‘governments, regulators and correspondent banks to understand the key issues and to identify potential solutions’.

Following the Pacific Banking Forum, the Australian Government described the impact that loss of banking services in the Pacific could have:

The decline of banking services affects the ability of Pacific banks and whole countries to access cross‑border payment services, connect to the global financial system and fund projects vital for economic development and essential services.

It also impacts the ability of the Pacific community and workers in Australia to send remittances home.

At the Forum, the following commitments were made:

• Support for exploring regional solutions to address the long-standing structural issues, including through the World Bank’s proposed Pacific Strengthening Correspondent Banking Relationships Project (correspondent banking relationships project)
• Commitments from Pacific Island nation delegates to the Financial Action Task Force (FATF) Standards and the Asia/Pacific Group on Money Laundering (APG) mutual evaluation process, and coordination of anti-money laundering/countering the financing of terrorism (AML/CFT) technical assistance through APG processes
• Exploring the development of new digital systems to support financial inclusion and lower compliance costs
• Technical assistance and capacity-building programs
• Engagement from regulators to align supervisory practices with respective national governments’ foreign policy, national security, and financial inclusion objectives
• Commitments from participating correspondent banks to provide technical feedback on the proposed World Bank project and to engage Pacific Island governments and respondent banks to consider strengthening correspondent banking relationships through the region, in line with countries’ enhancements of their AML/CFT frameworks and regional uplift of safe and sustainable banking sectors.

In light of this the government announced it would be adding $6.3 million to prevent the loss of banking services in the Pacific, including:

$2.9 million to the World Bank to support the development of inclusive and secure digital identity infrastructure across Pacific Island Countries

$1.7 million to the Asian Development Bank to enhance regional compliance with anti‑money laundering and counter‑terrorism financing requirements

$1.7 million for the Attorney‑General’s Department to assist with criminal justice and law enforcement capacity in the region.

Policy position of non-government parties/independents

At the time of writing, there were no comments on the Bill from the Opposition, other non-government parties or independents were identified.

Financial implications

According to the Explanatory Memorandum (EM), the financial impact on the Commonwealth is estimated at $1 million per year from 2025–26 to 2029–30.

As noted earlier, however, the special appropriation is unlimited, with the amount to be drawn from the CRF, and the duration over which it can be drawn upon left unspecified. As such, the amount that may be appropriated in ‘the unlikely possibility of a default in the region’ is not known at this time, but will be limited by the terms of each Pacific banking guarantee agreed with an Australian bank.

Key issues and provisions

Subclause 5(1) of the Bill creates an unlimited special appropriation to ensure that money from the CRF can be used to pay out funds to ADIs under the terms of a Pacific banking guarantee that they have agreed with the Commonwealth. The appropriated funds may or may not be needed.

The amount to be drawn from the CRF, and the duration over which these can be drawn, are both left unspecified, with the EM stating that the special appropriation is unlimited (para 1.9), and stating:

This is appropriate as the Commonwealth has not yet entered into a Pacific banking guarantee and requires flexibility to negotiate with ADIs on the amount of the guarantee.

A Pacific banking guarantee is defined in subclause 5(2) of the Bill as:

• a guarantee to an ADI headquartered in Australia granted by the Finance Minister under section 60 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act)
• relating to the ADI’s banking business (as defined in the Banking Act 1959)
• in the Pacific region (as defined in clause 3).

It is expected that any Pacific banking guarantees with individual ADIs would have to be negotiated separately. The EM notes (para 1.5):

to receive a guarantee, an ADI must have reached a legally binding agreement with the Commonwealth regarding their continued operations.

This means that the special appropriation created by the Bill would ensure that money will be available to be drawn from the CRF as, and when, it is needed. In other words, the appropriated fund may or may not be needed, for example, due to a default by Pacific-based branches of Australian ADIs.

Issue: lack of certain details regarding operation of the guarantees

Under the Bill, a guarantee will not be a Pacific banking guarantee (and therefore able to be funded by the special appropriation created by the Bill) unless granted under section 60 of the PGPA Act. Section 60 of the PGPA Act allows the Finance Minister to grant guarantees on behalf of the Commonwealth.

Section 107 of the PGPA Act allows the Finance Minister to delegate certain powers and functions, including those under section 60 of the PGPA Act, to the Secretary of the Department of Finance or an accountable authority or official of a non-corporate Commonwealth entity (NCE). Subsection 107(4) of the PGPA Act requires a delegate to comply with any written direction given by the Finance Minister.

The Public Governance, Performance and Accountability (Finance Minister to Finance Secretary) Delegation 2014, made under section 107 of the PGPA Act, sets out the delegations made by the Finance Minister to the Finance Secretary and provides directions applicable to each delegated power or function.[9]

Part 3 of the Finance Secretary delegation delegates the power to grant a guarantee under section 60 to the Finance Secretary and puts limitations on the circumstances in which the power may be exercised. Clause 3.2 provides:

When exercising the delegation, the delegate must consider two overarching policy principles:

(a) that risks should be borne by the party best placed to manage them; and

(b) benefits to the Commonwealth should outweigh the risks involved.

Clause 3.3 provides further guidance to the Finance Secretary, providing that they:

may grant an indemnity, guarantee or warranty, involving a contingent liability in relation to an event, if:

(a) the delegate is satisfied that:

(i) the likelihood of the event occurring is remote, (less than 5% chance); and

(ii)  the most probable expenditure that would need to be made in accordance with the arrangement, if the event occurred, would not be significant (less than $30 million).

The Department of Finance’s resource management guide Indemnities, Guarantees and Warranties by the Commonwealth (RMG 414) states:

If an indemnity is beyond these thresholds, a delegate can grant an indemnity on behalf of the Commonwealth if it has been explicitly agreed in a decision of Cabinet, the National Security Committee of Cabinet (NSC) or its successor or the Prime Minister, or a written determination of the Finance Minister (p. 3, emphasis added).

There is also a legislative framework for reporting indemnities. According to the RMG 414:

Legislative requirements for reporting contingent liabilities, such as indemnities, are contained in the Charter of Budget Honesty Act 1998 . Contingent liabilities with a possible impact on the forward estimates greater than $20 million in any one year, or $50 million over the forward estimates period are disclosed in Budget Paper 1 – Budget Strategy and Outlook [e.g . Budget strategy and outlook: Budget paper no. 1: 2024-25, Statement 9: Statement of Risks]. Indemnities do not impact fiscal or underlying cash balances unless the contingent event occurs, creating a liability (pp. 9–10).

However, while the total contingent liabilities are required to be reported on, there is ambiguity as to how much information on each agreement will be made public. It is probable that details could be kept secret as commercial-in-confidence, with lack on disclosed information on the fees that the banks will pay to the government.

Currently, the only directly relevant instrument in the context of Pacific guarantees appears to be the Public Governance, Performance and Accountability (Pacific Banking Guarantee) Delegations 2025. This deals with delegations of power relating to the guarantee proposed to be provided to the ANZ, but it is not a negotiated guarantee itself. It establishes the upper financial limit for that specific guarantee ($2 billion over 10 years), but does not explain exactly what the Commonwealth is guaranteeing, and how the guarantee will operate in practice. It appears that these matters will be dealt with in the actual guarantee given to the ANZ (and each relevant ADI as agreements are negotiated).

Any agreement comes with the risk (however small) of ‘incentive incompatibility’, whereby one party acts in ways that are contrary to the intent and spirit of the agreement. In this case, where the Bill seeks to guarantee Australian banks operating in the Pacific, it is not clear if it would be enough to incentivise ADIs to continue their low-profit margin operations in the Pacific, or whether the existence of such protection would create a ‘moral hazard’ scenario, whereby ADIs would be incentivised to engage in inappropriately risky behaviour to increase profits. However, the risk of a ‘moral hazard’ scenario appears low, given that subclause 3.1(3) of the Public Governance, Performance and Accountability (Finance Minister to Finance Secretary) Delegation 2014 provides that an indemnity cannot be granted to ‘expressly meet the costs of civil or criminal penalties of the indemnified party’ (for example, indemnifying an ADI for potential breaches of the banking regulations applicable to its operations in foreign jurisdictions).

In Australia, a domestic banking guarantee scheme provides a safety net for bank customers in what is otherwise a healthy, profitable, and well-regulated banking industry. This increases customer confidence in the broader economy, thus helping drive economic growth through increased deposits, that would then flow through the economy through the ‘multiplier’ effect. In the case of Pacific nations, however, the causality of such an approach is unclear, given the low deposit rates and low proportion of residents with bank accounts in some Pacific nations (p. 3).

It appears that the proposed guarantees are not primarily aimed at protecting customers, but at the banks, and that too in an industry that is already evidently unprofitable and failing. The ‘real’ effect of the Bill may, therefore, be to indirectly subsidise risk-taking in relation to unprofitable (or marginally profitable) markets rather than induce customer confidence in an industry and the broader economy. That said, the aim is not just to ensure there are Australian banks operating in the Pacific full stop, it is also to ensure PICs retain access to the regulated global financial system so that, at a national level, Australia can do effective business with PICs whilst also ensuring it doesn’t lose any geopolitical advantage.

Issue: what is the main driver of the Bill?

Another issue is the lack of clarity as to the key objectives of the Bill. The second reading speech appears to imply that a primary objective of the Bill is diplomatic/political, that is, to support and strengthen relations with Pacific nations. This is because of the ‘fastest withdrawal of correspondent banking services in any region in the world’.

As noted elsewhere, the reasons for this general pattern of debanking and withdrawal of correspondent banks from PICs – both Australian banks but also those based in other countries – is happening because market conditions in PICs (including market size) are themselves not conducive to independent, profitable banking operations.

In such a scenario, it appears that a key objective of the Bill is also mitigating the economic constraints facing the ADIs operating in PICs. The Treasurer, in his second reading speech, stated:

This legislation allows the Commonwealth to use its balance sheet to support Australian banks to maintain their Pacific operations.

It will enable the Commonwealth to guarantee an Australian banks' business in the Pacific—either directly or through its subsidiaries—against the unlikely possibility of a default in the region, which may force them to shut their operations.

Eligible Australian banks will pay a fee to the Commonwealth for the guarantee, it is not a subsidy.

The potential efficacy of the Bill should, therefore, be judged against this economic objective: ensuring ADIs maintain their operations in PICs.

In this regard, given the lack of detail on how the guarantees will overcome the unprofitability and other constraints faced by banks in their regular, day-to-day operations, the Bill poses an unanswered question: exactly how will it induce continuing operations by banks if bank profitability continues to worsen further over time?

The Treasurer, in his second reading speech, noted that ADIs ‘will pay a fee to the Commonwealth for the guarantee, it is not a subsidy’. Given the lack of details regarding the contents and operation of the guarantees, and the apparent issues related to profitability of banking operations generally in PICs, it is not clear if the fee charged for the guarantee (which create further economic costs for banks, thus amplifying the constraints that are already reducing their profitability) reflects a fair exchange of ‘value’ between the ADIs and the Commonwealth.

In this regard however, the Public Governance, Performance and Accountability (Pacific Banking Guarantee) Delegations 2025 (also referred to above) gives some indications of the desired ‘exchange’ of value between the Commonwealth and ADIs. Paragraph 5(2)(c)(iii) suggests that Pacific banking guarantees entered into under the Bill (once passed) must:

require that a fee is payable … at least annually, in relation to the benefit derived from the guarantee or the cost to the Commonwealth of administering the guarantee, or both.

Another important point relates to the types of risks that the bank guarantees would insure against. Specifically, paragraphs 1.4 and 1.5 of the EM state that ‘any guarantees made will cover low risk exposures of the guaranteed ADI…’. The Bill does not specify how the ‘low risk exposures’ will be defined. However, the Bill should be considered in the context of Part 3 of the Public Governance, Performance and Accountability (Finance Minister to Finance Secretary) Delegation 2014. As noted earlier, clause 3.3(1) provides that the Finance Secretary may grant a guarantee in relation to an event if satisfied that there is a less than 5% chance that the event will occur and that the most probable expenditure that would need to be made if the event occurred would be less than $30 million. (Note, however, that the Finance Minister may approve a guarantee that does not fall within these requirements.)

The requirement set out in the Public Governance, Performance and Accountability (Pacific Banking Guarantee) Delegations 2025 that the delegate is only to grant a guarantee to the ANZ that ‘will not result in the Commonwealth assuming a contingent financial liability of more than $2 billion over 10 years’, appears to suggest that the Bill will enable guarantees with respect to events with a low probability of occurring, but potentially substantial financial impact if they do.

Whilst the Bill and its explanatory materials do not detail how any subsequent disagreements with ADIs about the level of risk exposure will be resolved, given the any Pacific banking guarantees entered into under the Bill (once passed) involve legally binding agreements, it appears reasonable to assume that the usual processes for resolving contractual disputes will apply.

Perhaps most importantly however, the Bill and its associated documents also do not specify if coverage of the low-risk exposures would help mitigate the economic/profitability concerns articulated above.

In the context of the above-mentioned points, there is ambiguity about how the Bill will operate, and whether it will achieve its stated and implicit objectives. The explanatory materials could better explain its intended operation and scope, that is, it only creates a pool of funds now, but imposes additional, explicit legal requirements that later negotiations must satisfy. In this way, even though the specific guarantees between the Commonwealth and ADIs would depend on negotiations, there would be greater certainty about their ‘quality control’.

Concluding comments

The premise on which the Bill operates is straightforward. Incentivise banks to continue to operate in the Pacific by reducing various risks by offering particular guarantees. Indeed, it appears that the government has already done so, signing an agreement with the ANZ Bank at the time of writing this Digest. With the Commonwealth Bank ready to take over operations on Nauru, this may also send positive messages to other Australian banks that the Pacific is open for business.