By Gareth Vaughan
The country's big five banks are all distancing themselves from the revelation that they had been telling the Reserve Bank they were fully compliant with its outsourcing policy when a stocktake suggests they weren't.
As reported by interest.co.nz earlier this month, a stocktake of ANZ, ASB, BNZ, Westpac and Kiwibank's compliance with the outsourcing policy showed compliance ranged from 65% to 90% in terms of the overall effectiveness of practical and legal controls. This was detailed in a consultation paper issued as part of phase two of the Government's review of the Reserve Bank of New Zealand Act.
The consultation paper says that, across the five banks, the degree of variation suggests there was; "a material risk to the financial system, from a possible failure of a supplier to one of the large banks, resulting in that bank being unable to continue to operate. Given the size of the large banks in the New Zealand financial system, an issue for one of them could result in an issue for the entire system."
The Reserve Bank's attestation regime means bank directors must attest to, i.e. sign-off on, the accuracy of information contained in bank general disclosure statements. The directors of each bank have been attesting that their bank is fully compliant with the outsourcing policy.The stocktake took place in 2014.
Interest.co.nz asked ANZ, ASB, BNZ, Westpac, Kiwibank and the Reserve Bank about the comments on the outsourcing policy from the consultation paper.
A spokeswoman for ANZ said her bank was compliant with the outsourcing policy at the time of the stocktake.
An ASB spokeswoman said the Reserve Bank found ASB was "well positioned" in terms of compliance, and had appropriate processes and expertise in place.
A Kiwibank spokeswoman said any non-compliance with conditions of banking registration would have been included in the bank's disclosure statements.
A Westpac spokesman said his bank is committed to ensuring compliance with the outsourcing policy, and believes it was "at the strong end of compliance" in the stocktake.
A BNZ spokesman said; "Any non-compliance observed by [the] Reserve Bank would have been called out by the banks in their disclosure statements immediately following the review, and we’re not aware that any were found to be in that state."
Meanwhile a Reserve Bank spokeswoman said the regulator had nothing to add to what's in the consultation paper.
The Reserve Bank's outsourcing policy requires large banks, being locally incorporated registered banks with liabilities, net of amounts owed to related parties of $10 billion or more, to have the legal and practical ability to control and execute outsourced functions such as IT processing, accounting and call centres themselves. ANZ NZ, ASB, BNZ, Westpac NZ, and Kiwibank are big enough to meet that criteria. Between them the four Australian owned banks control about 88% of NZ banking system assets.
The outsourcing policy was designed to ensure a large bank’s outsourcing arrangements don't create risk that the operation and management of the bank could be interrupted for a material length of time. The risk associated with outsourcing, including to an overseas parent bank, is if a supplier of outsourced functions was unable to provide that function for some reason. This could result in an unacceptable risk to the bank’s ability to operate, and therefore the wider financial system, the consultation paper says.
The Reserve Bank moved to strengthen the outsourcing policy to include a regulatory approval process for some outsourcing arrangements and other safeguards, such as independent reviews of compliance. The revised outsourcing policy was introduced in September 2017. The Reserve Bank put the cost, to banks, of the revised policy at $550 million, and the net benefit of the policy at $2.2 billion. The banks put the cost at $870 million and net benefits at $1.9 billion.
In May last year BNZ suffered a major weekend service loss, including most banking, online banking, EFTPOS and ATM services, which was blamed on its parent National Australia Bank. At the time the Reserve Bank said NZ's major banks should have systems in place to prevent a repeat of that BNZ outage once they've implemented the new outsourcing policy, which has a deadline of September 2022.
Interest.co.nz asked the five banks when they anticipate being fully compliant with the Reserve Bank's new outsourcing policy.
The ANZ spokeswoman said ANZ's on track to be compliant ahead of the 2022 deadline.
The ASB spokeswoman said ASB's confident it will be compliant in time.
The Kiwibank spokeswoman said banks must comply with the new policy for new contracts and transition existing contracts into the new regime over the transitional period which goes until 2022.
The Westpac spokesman said Westpac expects to be fully compliant with the revised policy within the timeframes required by the Reserve Bank.
And the BNZ spokesman said BNZ's "working constructively" with the Reserve Bank to ensure it's fully compliant ahead of October 2022.
*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.
2 Comments
Not one said they were compliant now and had been since 2014.
Aussie banks are 65% exposed in equity terms, to mortgages in Australia. This has risen considerably in the last 10 years.
Leverage among urban dwellers in age bracket 25-45 is far too high against their own homes, as they tried to jump on gravy train. of buy to let. Problem for Australia in general is its total dependence on China, which is ailing. Also, Aussie dollar is weakening and may need defence form foreign reserves in near future. Next problem is that Australia foreign reserves are $90b and they have $800b to roll over in bond market pa. SO if Aus dollar comes under more significant pressure, reserves will come under pressure. Then interest rates will have to rise and then mortgage holders will be in big trouble. Along with their debt holding banks. People are unfortunately forgetful or ignorant of the fact that due to double entry magic, banks assets are in fact made up of debts. And the real capital asset base gets smaller each 5 year period. SO the tottering edifice is a big risk. Never mind derivatives and MBS and CDOs. Hopefully the NZ pop keep looking at 20 min rugby coverage and any other sport valorisation and don't bother their little heads with these matters.
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