The Reserve Bank today published its final policy decisions on a revised outsourcing policy for locally incorporated registered banks.
An earlier review of the current outsourcing policy, which is published in chapter 11 of the Banking Supervision Handbook (BS11), found that the policy was being inconsistently applied. This lack of consistent compliance with the policy could compromise system stability in stress situations and potentially undermine the viability of Open Bank Resolution (OBR).
Deputy Governor Grant Spencer said the main aim of the revised policy is to ensure that New Zealand banks are able to continue operating in the event of the failure of a key service provider, especially when the service provider is a related party.
“The outsourcing policy enhances the viability of OBR as a means to resolve a bank failure, therefore reducing the risk of taxpayer funds being required to resolve a failed bank. The policy ensures that a failed bank will be able to continue to provide liquidity and a basic level of banking services to customers. This means that wider systemic effects from a bank failure can be kept to a minimum,” Mr Spencer said.
The Reserve Bank undertook extensive consultation with banking industry and other interested parties throughout the policy development process, with public consultations in 2015 and again in 2016, numerous meetings with banks, and discussions with key stakeholders in New Zealand and overseas. The final policy has been significantly shaped and amended by the feedback provided by the banking industry and other stakeholders.
Key features of the final revised policy include:
- a formal definition of outsourcing;
- a formal engagement process with the Reserve Bank on new proposed outsourcing arrangements with related parties;
- robust-back up arrangements for key functions outsourced to a parent or other related party;
- strengthened contractual provisions for outsourcing arrangements;
- foreign-owned locally incorporated banks to produce separation plans;
- clarity on the level of service a bank must be able to continue providing in the event of a failure and possible separation from its parent; and
- a five year transitional path, during which affected banks have to become compliant with the outsourcing policy.
Mr Spencer said the Reserve Bank acknowledges the investment that some banks need to make in order to fully comply with the revised policy.
“Every effort has been made to keep these compliance costs as low as possible without compromising the policy’s key objectives. The Reserve Bank considers that the revised policy will not unduly hinder banks from achieving the potential efficiency benefits of outsourcing arrangements.”
Alongside the final policy decisions, a summary of the responses to the two consultations and a Regulatory Impact Statement have also been published today, along with individual responses to the two formal consultations.
The Reserve Bank plans to consult next month on an exposure draft of a new BS11. This consultation will focus on ensuring that the revised version of BS11 clearly communicates the requirements of the policy. We anticipate publishing the final wording of the policy in the second quarter of the year.
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