Fail-safe rules for banks unveiled

The Reserve Bank's proposed policy on outsourcing by large banks registered in New Zealand was published yesterday.

The RB is trying to limit the "hollowing out" of banks, whereby computing and back-room operations are outsourced overseas. Foreign-owned banks have 85 per cent of the local market,

Adrian Orr, the RB deputy governor, said the bank was not against outsourcing and saw it as part of the global financial system.

"However, outsourcing can expose banks and, hence, New Zealand's financial system as a whole, to risks that must be managed."

The proposed policy would require a large bank's board of directors to have the legal and practical ability to operate their bank stand-alone, if the bank's owner, or another provider of services to the bank, failed.

"This would also need to apply should a statutory manager of the bank ever be appointed," Orr said.

"The proposed policy would not permit systemically important banks to outsource key functions where, as a result, their ability to keep operating in a crisis could be put at risk."

If a large bank wanted its owner or another party to process its transactions, this would not be permitted if it meant that the bank could not function if the owner or other party failed.

Orr said the rules were outcome-based rather than prescriptive, which would allow a degree of flexibility, and were planned to be in place early next year. The proposed policy was not an industrial one, but aimed solely at meeting the bank's statutory responsibilities under the Reserve Bank Act.

"The objective is not to retain IT services or other industries in New Zealand, but rather to ensure that any IT or other services provided to banks under outsourcing arrangements, whether in New Zealand or abroad, include the protections that would be required to avoid significant damage to the New Zealand financial system that could result from either the failure of a registered bank, or of a material provider of outsourced services."

The RB policy would apply to all "systemically important" banks. Orr said the RB had begun talks with ANZ National, after their amalgamation, and with Westpac. The RB is upgrading its prudential supervision regime generally.

- NZPA