Banking policy eases demands

New Zealand's Australian-owned major banks have been given a little wriggle room in a new draft of Reserve Bank rules designed to minimise the impact of a failure by their parents across the Tasman.

The RBNZ yesterday published its revised draft policy on outsourcing for the major banks.

Outsourcing refers to a bank's use of another party, including related parties such as its Australian parent, to perform business functions, most usually IT services, that it would otherwise do itself.

The Reserve wants each bank to retain "the legal and practical ability to control and execute any outsourced functions to ensure that it has the ability to continue to provide core liquidity, payment and transaction services in the event that one of its service providers fails or becomes dysfunctional, or if the bank itself fails".

The revised policy placed a greater emphasis on the role of bank directors in managing outsourcing risk as a normal business risk than the draft issued in November.

The Reserve Bank said its policy did not ban outsourcing.

"Provided that a large bank is able to meet the outcomes required, it will have freedom to pursue outsourcing strategies tailored to its particular circumstances and operational preferences."

Banks argued that the policy could cost them millions, but Reserve Bank Deputy Governor Adrian Orr said there had been an attempt to minimise any excessive costs "by focusing on the outcomes we require, rather than being prescriptive about banks' systems".

Orr said that gave the banks more flexibility to meet the requirements.

The Reserve Bank said it would work with banks individually to implement the draft policy.

Massey University head of banking studies David Tripe said the Reserve Bank had toned down its policy in an attempt to avoid being "unnecessarily provocative".

"The key non-negotiable point they're after is that the outsourcing of technology for banks that operate in New Zealand must be subject to the constraint of providing continuing banking services for New Zealand. That's a key driver," he said.

"They've said, 'We won't be as hard and fast as we might have been previously. If you've got a way by which this objective can be achieved, tell us what it is and we'll have a look at it'."

Tripe said compliance with the policy was likely to cost the banks "a few, not many, millions".