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RBNZ releases finalised outsourcing policy for banks

18 January 2006

The Reserve Bank today published its finalised policy on the requirements which will apply to large New Zealand banks that have entered into outsourcing arrangements. The final policy follows consideration of comments on a draft policy issued in October 2005.

Reserve Bank Deputy Governor Adrian Orr said: "While outsourcing of banks' business functions is increasingly common and often a sensible business practice, it can expose banks and the financial system to new or increased risks that must be managed appropriately. Under the Reserve Bank's policy, outsourcing is permitted so long as it does not undermine a large bank's ability to continue to provide core liquidity, payment and transaction services both in good times and under stress."

"Failures of banks and of service providers to banks are low-probability events, but they can have a potentially high and immediate impact across the economy. The outsourcing policy provides safeguards to the stability of the New Zealand financial system against the possibility of such occurrences.

"Consistent with our earlier proposals, the policy focuses on ensuring that the boards of large New Zealand banks maintain the legal and practical ability to control outsourced functions so that the banks can continue to provide critical services in a crisis situation. The policy also requires the boards to exercise meaningful control and oversight over the bank's chief executive and staff."

Mr Orr commented that "the policy maintains our approach of focusing on the outcomes we require of banks, rather than being prescriptive about banks' systems. This approach allows banks more flexibility in meeting the requirements and means that the policy will not involve excessive costs for them. The emphasis also remains on bank directors managing outsourcing risk as part of their normal business processes".

The Reserve Bank will now work on implementation of the policy with those banks that are subject to it. Implementation will take into account each bank's individual circumstances and investment cycles.

View the final policy and associated documentation.

For further information contact:

Mike Hannah

Head of Communications

Ph 04 471 3671, 021 497418, [email protected]