Australia has pledged to increase investment in Pacific Island countries to bolster their financial systems, it was announced on Tuesday, as banks are severing ties with the region due to perceived risks, while China is seeking to expand its influence there.

Some Western banks have terminated long-term relationships with their counterparts in small Pacific nations, while others have considered closing operations, thereby limiting access to US Dollar-denominated bank accounts.

“We know the Pacific has seen the fastest withdrawal of correspondent banking services of any region in the world,” said Australia's Treasurer Jim Chalmers during a speech at the Pacific Banking Forum in Brisbane.

“At stake here is the ability of the Pacific to engage with the world,” he added.

The Pacific region lost approximately 80% of its correspondent banking relationships in services denominated in US Dollars, between 2011 and 2022, Australia's Assistant Treasurer Stephen Jones stated at the forum co-hosted by Australia and the US, Reuters reports.

Australia will allocate an additional A$6.3 million to the Pacific for the development of secure digital identity infrastructure and to improve compliance with anti-money laundering and counter-terrorism financing requirements, Chalmers stated.

Western banks are de-risking to meet financial regulations, making it more challenging to do business in Pacific Island nations, which often lag in compliance standards. This, in turn, weakens financial resilience in these countries, according to experts

Australian bank ANZ is in discussions with the government about ways to enhance the profitability of its business in the Pacific Islands, amid concerns that the withdrawal of Western financial services is increasing Chinese influence in the region, its CEO stated on Tuesday.

ANZ is the largest lender in the Pacific, operating in nine countries, though some of these businesses are not financially viable, CEO Shayne Elliott said in an interview.

“If we were there purely commercially we would have just shut it down,” he added on the sidelines of the forum.

Western nations that have traditionally dominated the Pacific are increasingly worried about China's intentions to expand its influence in the region, especially after Beijing signed significant defence, trade, and financial agreements there.

Indeed, Bank of China signed an agreement with Nauru to explore opportunities there this year, following the announcement by Australia's Bendigo Bank that it would withdraw from the country.

Chalmers added that Australia is collaborating with Nauru to secure continued banking services in the country.