The Reserve Bank of New Zealand has announced plans for a fundamental review of its decade-old policy preventing major banks from outsourcing their core systems beyond New Zealand.
The central bank, which also regulates New Zealand's banks, announced the plan for a review in its half yearly Financial Stability Report on Wednesday.
The bank's rules on outsourcing were developed when ANZ bought National Bank in 2003, forcing it to keep core functions in New Zealand. The policy also forced Westpac to stop a move of its core systems from Auckland to Sydney at the last minute in 2004.
"We think it's a bit of a time for a refresh," Reserve Bank Deputy Governor Grant Spencer told a news conference to release the FSR.
"Different banks have had different interpretations of what is a core function and what's not a core function and we've had an outcome-based policy which has not been very prescriptive in terms of a set of functions you can outsource and a set of functions you can't outsource," he said.
The Reserve Bank had reviewed all those in-house and outsourced functions at the major banks over recent months and had decided it needed a clearer policy.
"It's that policy end of it that we'll be developing over the next six months," Spencer said, adding new developments in cloud computing technology would be considered.
The bank said it expected to formally consult on the revised policy in early 2015. It would apply to banks with liabilities, net of amounts due to parents, of over NZ$10 billion.
The regulator said in its report it would undertake a full first principles review of the policy, including whether the definition of 'core function' should be retained, and what legal and practical controls banks should have over their outsourced functions. It would also look at whether separate policies for outsourcing, business continuity planning and failure resolution were required.
Elsewhere in the report, the Reserve Bank said it had stress tested the four major New Zealand units of the Australian banks with the Australian Prudential Regulation Authority (APRA) this year. It modelled two scenarios, including one with unemployment at over 13 per cent and house price falls of 40 per cent, and another with floating mortgage rates at up to 12 per cent and unemployment of almost 12 per cent.
The tests found the banks' Common Equity Tier 1 (CET1) ratios fell by around three percentage points to just under eight per cent in each scenario, which was still above regulatory minimums. However total capital ratios fell into the buffer zone that would trigger the suspension of dividends.
Box A in the RBNZ report details the stress test results.