constraint, the local board has much more than a rubberstamping role. another important policy requirement that we are developing to protect the new zealand financial system relates to the growing practice of outsourcing core bank functionality. here, i am referring to the tendency for foreign - owned banks to move large parts of their functionality to the parent bank or to third parties - which are often in another country. in new zealand, this has been occurring on a significant scale. and it has not just been confined to the obvious areas, such as it systems, accounting functions and the like. outsourcing to the parent banks has also included the movement of risk management capacity, some treasury functions and some senior and mid - level management and technical expertise. outsourcing makes it more difficult to supervise a bank effectively on an ongoing basis. this is especially so where core risk management functionality has been migrated offshore. in these circumstances, there is a limit to what any supervisor can achieve in seeking to promote sound risk management structures within the local bank. it also has the potential to weaken the role of the local board, thereby compromising the ability to ensure that governance arrangements are adequate to protect the interests of the local bank. but when the storm clouds gather, the effect of outsourcing can be very serious for a host banking system. in a situation where a parent bank is in acute difficulty, it is likely that its foreign operations will also be in difficulty. if the parent bank is unable or unwilling to provide financial support to the subsidiary, and if the home authorities are unable or unwilling to extend official support to the foreign subsidiaries of the parent bank, then the host authority needs to have sufficient functionality in the bank in its jurisdiction to maintain systemically important functions. a bank that relies substantially on outsourced services to its parent, or on inadequately outsourced arrangements to unrelated third parties, will not have that capacity. it will be substantially dependent on the outsource provider in order to maintain even quite basic functions. in a situation where the outsource provider is in serious strife, there is no guarantee that the bank will be able to maintain essential functions. in this situation, the host authority has limited scope to manage the crisis in its own jurisdiction. for these reasons, and in accordance with our legislation, we have initiated an outsourcing policy for application to all systemically important banks and potentially to some of the other banks. in essence, the policy will require banks to maintain sufficient functionality within the

home authority to protect the host financial system. this does not mean that we are not still considering the issues with an open mind. but at this point, we need to continue to place importance on our ability to supervise the new zealand banking system and to respond to a banking crisis in ways that enable us to protect new zealand ’ s interests without placing undue reliance on the actions of the home authorities. that said, we also recognise that the most effective response to a cross - border crisis would desirably involve close cooperation and coordination between the home and host authorities. we are therefore actively working towards the implementation of enhanced home / host supervisory and crisis response arrangements, while still retaining a strong capacity to independently manage a banking crisis. our dual aims are to maintain the capacity to protect the new zealand financial system on a stand - alone basis, while also building the framework for closer coordination between the host and home authorities. let me highlight the key features of both aspects of this approach. our supervisory tools are similar to those of a home supervisor. while we have adopted a somewhat less intrusive approach than some supervisors, we require all banks, whether foreign - owned or domestically - owned, to comply with the same basic requirements, including in respect of minimum capital adequacy, related party exposure limits, comprehensive public disclosure requirements, governance requirements, and so forth. we monitor all banks on a regular basis and consult with the senior management teams of each bank annually, again, regardless of whether they are foreignowned or domestically - owned. we also take a close interest in the parent banks of the systemically important banks in new zealand, including monitoring their financial condition and meeting with their senior management teams. in all of these areas, we have sought to dovetail our supervisory arrangements with those of the home supervisors - particularly australia - in order to keep banks ’ compliance costs relatively low and to avoid excessive operational inefficiencies for banks. we are a welcoming, but responsible, host. this approach is reflected in a range of areas, including in the approach we have taken to the prudential requirements for banks and in the way we monitor and assess banks. looking forward, we see scope for further dovetailing of this nature in the context of closer coordination between the new zealand and australian authorities. however, the dominance of foreign banks in the new zealand banking system has resulted in some additional supervisory measures being taken to ensure that the interests of the new zealand financial system can be protected. by and