By Adrian Orr*
Now is the time for New Zealand banks to act with courage to keep banking services, including money remittances, to the Pacific Islands open.
The scale and complexity of the challenges facing Pacific Island countries are significant, including climate change and the severe economic impacts of Covid-19. With international travel and trade disrupted by the pandemic, many Pacific Island countries are facing tough times.
That means the economic importance of Pacific people in New Zealand being able to send money back to their home countries through remittances and maintaining financial corridors and services into the South Pacific countries continues to grow.
New Zealand bank boards and chief executives need to show courage by supporting banking services and remittances with the ultimate goal of a stable, prosperous and resilient South Pacific region.
We believe that courage is displayed by a bank when it provides essential financial services through good times and bad, as one would expect from any trusted long-term partner. The Reserve Bank expects that banks manage and mitigate risks rather than simply avoid them. Anti-money laundering laws are not an excuse to “de-bank” or “de-risk” from the Pacific Islands.
The Pacific Islands are generally lower risk countries – in fact the Australian to Pacific remittance corridor was assessed as presenting a low risk of money laundering and terrorism financing according to AUSTRAC, the Australian Government agency responsible for detecting criminal abuse of the financial system.
At the same time, the Reserve Banks of New Zealand, Australia, Fiji, Papua New Guinea, Samoa, Solomon Islands, Timor Leste, Tonga, Vanuatu, and others are working together on developing a regional ‘know your customer’ facility, to help support remitters and other businesses in meeting their compliance obligations.
Withdrawal of correspondent banking services and ‘de-risking’ of remittance service providers is making it harder and more expensive for Pacific peoples to access banking services and send money back to their home countries.
What is “de-risking”?
‘De-risking’ refers to the trend of financial institutions deciding to avoid, rather than to manage operational and compliance risks by ending business relationships with entire regions or classes of customers. As well as impacting on money remittance services, this practice has impacted on the withdrawal of correspondent banking relationships in the South Pacific region which could lead to a disproportionate effect on the region.
In an extreme case, a near-complete loss of correspondent banking relationships could severely limit a nation’s access to the global financial system. That could curb basic payment and currency exchange transactions which allow for remittances and trade, and could push remittances towards more unregulated and risky options, increasing financial system risk.
What is Correspondent banking?
Correspondent banking is the provision of banking services by one bank to another and withdrawal of these relationships has been accelerating in the Pacific. This is of concern to the Reserve Bank as correspondent banking is an important means of facilitating cross-border movements of funds, and enabling financial institutions to access financial services in different currencies and foreign jurisdictions. These correspondent banking relationships support international trade, commerce and remittances flows, all of which contribute to promoting access to necessary and affordable financial services in the Pacific.
Why remittances are critical for the Pacific
New Zealand banks should recognise the importance of providing and retaining financial services provided to the region and keeping remittance corridors open and cost effective between New Zealand and the Pacific Islands. Pacific Island countries are some of the most remittance-reliant jurisdictions in the world. For instance, World Bank data shows remittance as a share of Tonga’s GDP is approximately 40%, while for Samoa it is 17% and for Fiji 7%, with New Zealand one of the main sources of these funds.
The Reserve Bank is working with other government agencies in New Zealand, Australia, the Pacific and internationally to make remittances more accessible, safe and cost effective.
New Zealand banks have key roles in ensuring these remittances corridors remain open. These range from having a banking network in the Pacific, providing banking services to businesses who provide remittance services to and from the South Pacific and providing correspondent bank relationships and foreign currency accounts to other banks operating in the South Pacific region.
The Reserve Bank asks New Zealand banks to make supporting Pacific Island countries and their economies a strategic priority. We call on New Zealand banks to consider ways to make a positive difference to the region.
The RBNZ acknowledges and commends a range of bank-led initiatives that have taken positive steps towards supporting the South Pacific region. These initiatives, alongside constructive engagement with banks on South Pacific related issues and initiatives, are very encouraging. However, the RBNZ’s view is that more could be done.
*Adrian Orr is the Governor of the Reserve Bank of New Zealand.
21 Comments
Now is the time for The Reserve Bank to act with courage and turn the corner on interest rates. Enough of the endless cuts and irresponsible chatter about the possibility of negative interest rates. Rule this out as a step too far, then look at some modest increases to the OCR.
What is “de-risking”?
De-risking involves not staking New Zealands future on an ever-inflating housing market. Anything that can be done to reverse the current course should be done by The Reserve Bank. Now is the time for The Reserve Bank to act with courage
No Hope!.
We pay the No Hopers, often called Bankers and Politicians to do the right thing. In all my life time, we have bailed out so many times, it is unbelievable that they penalise people who do not owe a penny, a cent, whatever and put the whole World "At Risk" of a debt blow out.
All while taking advantage of the counterfeighting of currencies and paper munny.
This is the biggest rort in History.
Savings are destroyed in the mean time, by the rush to blow up Houses and pump them up with $Savers munny....
Debt is not finite........Even Ant and Dec....May be famous, but not immune..........a rort is a rort is a rort....and someone Pays.!!?? do they not.
https://www.thesun.co.uk/tvandshowbiz/14772176/ant-and-dec-phillip-scho…
Very noble but likely to fall on deaf ears or at best some PR or virtual signalling likely. To obtain the requirements of AML and fulfill the remittance issue via correspondent banks additional employees will be required and not just one or two. This is a cost to the bank affecting profits. The easy option is not to do it which apparently is the case.
Since NZ provides aid to the mentioned countries, NZ could open a retail bank in those countries under the auspices of RBNZ to handle remittances. The net aid does not have to be altered, just cut back on other aid. To overcome the corruption issue in these countries, suitable ex-pat NZers can be used to oversee the local bank employees.
Unrelated to the above - It is so heartening to see that Mr. Orr reads the articles and comments in this site. Well, that's a presumption since he has written an opinion piece that he is aware of this site and possibly checks in on the articles now and again or daily.
So frustrating on the other hand that he doesn't learn and refuses to adapt based on all the articles and comments that have been pouring in regarding RBNZ's reckless policies and how it impacts the average NZ who does not have a massive property portfolio.
As taxpayers who pay for the salary of the RBNZ staff, what will you tell an employee who does not listen or heed to feedback or criticism and continues to operate on vested interest?
Courage does not fundamentally alter the risk and reward calculations for the banks at all. I argue the problem fundamentally is a profitable one, but not one which cannot be solved without more effort from the regulators, which I also outlined below.
On the side of the risks, banks face hundreds of millions of dollars in fines for AML failings (it is still not clear that what extent of the liability should the bank shoulder when during onboarding, everything is proper). Worse yet, the reputation damage compound on the loss. The expected damage/loss is calculated with the probability of the event times the potential damage. Even if the former is "managed", it is:
1. Not zero, so given enough time it will happen;
2. Even small, the expected damage is still tremendous due to the large second number of the equation for most banks.
A singular large loss event aside there are ongoing costs of compliance, in the form of additional resources to "manage" the risk, that very few remittance companies can make up for the bank, let alone generate a profit for the bank. If they do, it will be because of the higher fees, precisely another issue to be addressed.
The last major risk for our banks would be the loss of USD correspondent bank accounts with US counterparts, which creates major disruptions in a large bank's operations. Ultimately, why would a bank put its entire operations through and through in jeopardy, to NOT make money? It makes no commercial sense.
Even in the charitable sense, it is one thing to ask for donations, another to ask one to risk their lives for it.
I only see two solutions to which the only one is appealing. The current route being taken seems to be of one that "use our KYC facility and you will essentially be indemnified". It is definitely a positive step forward. However, the "indemnity" on AML failings for providing services to the remittance sector, while technically addresses some problems, it is ultimately unacceptable. Runs contrary to the intention of the law aside, it gives NZ a bad reputation in the eyes of FATF, does not address USD correspondent bank risks, does not fundamentally alter the issue of fees, and morally dubious if this is used to "order" banks to take on these risks.
In my view, the more appealing solution is the one that Australia is doing, and simply for RBNZ to adopt the same, especially making use of the Reserve Bank Act review. That is to provide payment facilities directly to the remittance sector. For example, TransferWise, now known as Wise, valued at a few billion dollars and established themselves as a key player in remittance, has obtained such capability in Australia.
https://www.afr.com/companies/financial-services/apra-gives-transferwis…
This solution addresses all issues currently present and should be in addition, not instead of, a KYC utility. Applicants ought to be directly vetted by RBNZ for capabilities. During this vetting, the KYC utility can be verified and properly implemented. If successful, the applicants will be granted direct access to RBNZ's payment facility, including foreign currency accounts, similar to that of Australia.
This addresses almost all of the issues.
1. RBNZ's USD correspondent account is almost impossible to be cut off;
2. No risks of fines and reputation damage for commercial banks, and thus no need of any "indemnity";
3. RBNZ can adjust the fees charged to provide the payment services, thus directly influence the remittance costs, if provided for free, then the cost of remittance dramatically be offset;
4. RBNZ directly supervises the participants for strict AML ongoing compliance; and
5. Remitters can still have the option of going to commercial banks.
In my humble view, simply calling for courage when the very thing being asked to display that courage is survival, is too big of an ask. RBNZ should undertake more steps, in addition to the KYC facility, to help its goal without endangering the integrity of the AML/CFT Act and NZ's reputation.
The reality is mainstream banks are currently actually exiting the Pasifika economy's. Banks pay a critical role in an economy and Orr is right to highlight it. I would advocate explicit incentives by the RBNZ - capital relief, introductions or guarantee's perhaps?
The existing banking system can do the job. It's not even that difficult. It would not surprise me if Orr and the bankers have had no or limited engagement with Ripple. Japan's SBI has already set up cross border payment systems with SEA nations using RippleNet.
Article outlines what Ripple is doing in SEA cross-border remittances.
https://www.nasdaq.com/articles/ripple-is-winning-its-sec-battle-dont-f…
While a firm believer of blockchain technology and its underlying value, and long-term holder of some mainstream coins with no intention to sell, I don't think Crypto is mature enough to solve these issues for now. Adoption within the community is a challenge, extreme volatility is another for XRP and for even Bitcoin lately, and the last is the lack of updated regulatory frame-work. The road for blockchain should be a long-term, prudent one but not rushed adoption.
Perhaps one day crypto will and should step up and solve these once and for all, but it is not now and it takes time. On the other-hand, the urgency of the issue cannot wait. Thus, at the very least for now, the issues must be urgently addressed via more traditional solutions.
I don't think Crypto is mature enough to solve these issues for now
Not sure if that response is to me or not. And if it is, you didn't pay much attention to what I wrote. Forget about crypto, blockchain solutions are already being used in cross-border payments and remittances on a scale much larger than the channel between NZ and the Pacific Islands. Ripple has ended their relationship with MoneyGram, but here is another example of remittances from Australia to the Philippines.
https://ripple.com/insights/novatti-taps-odl-to-improve-australian-remi…
Your post has literally nothing to do with blockchain and is traditional money transfer
You obviously can't read then. RippleNet and ODL is all about blockchain. Have another go.
Even if we assume that the pacific islands have lower risks of money laundering, we cannot escape the fact that the risks of default is much higher in those nations. Fiji has a country credit rating of BB- (junk), Samoa and Tonga are not even rated.
Why would a established and profitable bank increase their exposure to more regulatory risks in a market where default risks are high?
Samoa should just recede to the USA and start using USD, BOA and Wells Fargo might be interested in setting up branches there just like in American Samoa.
Fiji and Tonga can consider approaching Euro Pacific Bank to invest in a banking system in their country.
I am sure Mr Adrian have done enough research before writing an article on this platform & I have to admit he have guts, after knowing how much average class Kiwi hate him for playing major role in housing boom in Covid time. Surprisingly he ignore all the in-house (NZ) pressing issues & put thought for neighboring problem.
It doesn't make sense to have a lecture on banking from a person who failed miserably to deliver his job & not even taking responsibility, also lose his authority to take decision to Mr Robertson just week back because of incompetency.
He better resign and start writing articles and trust me he is not very good in that also, the only thing we can't see here is sweating & fumbling, as he do in most his interviews.
Nationalise 'em Adrian - do it.
Nothing smacks of mental bandwidth to spare quite like writing Op Eds on interest.co.nz, no matter being charged with maintaining the integrity of what is arguably the most critical social institution of them all - money.
The way modern, usurious fiat is managed, being 'de-banked' may with time be a blessing in disguise. Could you imagine the staffers going out fossicking to collect 100 billion Kina or cowries to shore up liquidity?
It's truly astounding that Adrian Orr the Governor of the Reserve Bank of NZ, not only didn't once front-up on Interest.co.nz during the last whole year while house prices were inflating to a level beyond what anyone thought possible - caused by his super-hasty slashing of the OCR and simultaneous removal of LVR restrictions, and without any moderate 'watch and wait' which he now appears to favour when it comes to taming house prices. While house prices in NZ were skyrocketing further and further out of control, Orr very sternly chastised journalists from Stuff and Interest for supposedly using the house price issue as "click-bait", as if he genuinely believed himself important enough to influence what reporters say and do, and showing his lack of concern of the issue. Now we are supposed to believe the Reserve Bank's concern stretches to Pacific Islands falling on tough times while Kiwis, including those from the Pacific Islands, are still wondering how in hell they they are going to purchase shelter here let alone pay the mortgage on these overinflated house prices
I'm surprised that comments were allowed on this article and that there are so few comments given the rage within the commentariat at their favorite hate figure.
For myself I think that Adrian Orr has done a good job of maintaining some kind of growth in the economy with little help from the Minister of Finance.
It's not pleasant for a first home buyer to have saved a large deposit for a house over the Covid lockdown period expecting carnage in the economy and house prices to be at rock bottom levels afterwards only to find that all the other buyers have been saving as well. Not only that but all the investor buyers realising that they need a return on their money and houses are it. And then the govt having exhausted their courage with the wage subsidy going back to not spending on social housing or much else in the real economy and Mr Orr having to step up to provide liquidity that neither the banks nor the fiscal arm of the govt would supply.
Naturally people wanting to get a first home are very angry about the way events have played out. So are people in the US, UK, Europe and lots of other places because exactly the same thing has happened in their countries, countries where Adrian Orr is not in charge.
This is the neoliberal way. Govts aren't suppose to spend money in the neoliberal universe. Politicians are supposed to cut taxes and reduce social spending. Reserve Banks are supposed to be independent but also fight inflation by tightening the money supply. What has actually happened is that govts have reverted to being neoliberals at the first opportunity and left the Central Bankers to take the flak for doing what needed to be done i.e. provide liquidity for the economy.
In Brazil and the US national govts refused to lockdown, so state govts had to do it for them, but there was ongoing carnage and the US Federal Reserve didn't have much choice but to provide stimulus because Trump was dragging his heels and helping the wealthy rather than those who needed it.
Those who tried hardest to be complete neoliberals caused the most carnage in their economies but that didn't stop house prices in those countries from rising dramatically.
Now Biden is spending money in the real economy, seemingly getting the pandemic under control and the Federal Reserve will be able to take the pedal off the gas. That is if they concentrate on US concerns and ignore the rest of the world.
I'm fascinated by the graphs at http://moneymovesmarkets.com/ (link provided by a commenter). The G7 + E7 Narrow money is interesting. If the top of this liquidity proxy was in July 2020 and the lag is supposed to be 6-7 months then that puts the top of the market in March 2021. Looking at the Global PMI graph it looks more like a year and a bit for the lag to me. I imagine that the lag might be 6-7 months for bitcoin and carbon credits but house prices are sticky.
I don't like the saw tooth look of the graph though, the liquidity downswing seems overdone and if it's only fiscal action in the US holding the fort then I think people should be careful what they wish for. If govts don't act in concert with the US fiscal push then other countries Reserve Banks will have to step in, again, to stop their countries going into recession.
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