Reserve Bank firms up outsourcing policy

The Reserve Bank today released its final policy on outsourcing by New Zealand's biggest banks.

The policy is aimed at preserving banks' ability to provide core services, and limit the "hollowing out" of banks when IT and back-room operations are outsourced overseas.

It is a watered down version of the first draft, released in late 2004, which sparked an outcry from banks, who said it would have cost millions of dollars in lost efficiency savings by requiring banks to retain a base of IT processing, accounting and call centre services here.

In the final policy, outsourcing is permitted so long as it does not "undermine a bank's ability to continue to provide core liquidity, payment and transaction services both in good times and under stress".

"Failure of banks and service providers to banks are low-probability events, but they can have a potentially high and immediate impact on the economy," Reserve Bank deputy governor, Adrian Orr, said.

"The outsourcing policy provides safeguards to the stability of the New Zealand financial system against the possibility of such occurances."

The policy requires the boards of banks to have "meaningful control and oversight" over the bank's chief executive and staff.

Banks must also maintain the legal and practical ability to control outsourced functions so that the banks can continue to provide critical services in a crisis.

The policy only applies to banks whose New Zealand liabilities exceed $10 billion. That includes ANZ National Bank, ASB Bank, Bank of New Zealand and Westpac.

The risk of failure by a large bank is remote -- a one in 900 year occurrence for Australian banks and about one in 100 years for New Zealand banks.

- NZPA