BCBS Sets Out Findings on Outsourcing and Concentration Risk Practices

The outreach sessions were aimed to assess the status of better established practices related to third-party risk management and to exchange views regarding evolving practices related to fourth-party risk management and concentration risk. The outreach sessions confirmed the importance of banks implementing the practices set out in the Principles for Operational Resilience (POR) and the revised Principles for the Sound Management of Operational Risk (PSMOR). Among other matters discussed, banks and supervisors noted the following: 

• Primary gaps related to firms' third-party risk management include a lack of clarity regarding respective bank and service provider responsibilities, insufficient monitoring of critical fourth parties, inadequate challenge or oversight from second lines of defense, and a lack of developed and tested business continuity plans.
• Banks and supervisors are concerned that a lack of complete supply chain transparency may increase operational risk. Risk-management efforts are focused on immediate suppliers, though key risks stemming from outsourcing arrangements may be driven by suppliers further down the supply chain.
• While several banks maintain formal exit strategies with respect to critical suppliers, they often lack sufficient detail and testing and identifying the appropriate stage to execute a strategy can be unclear.
• There are a range of tools for managing operational disruptions, such as the substitutability of a third-party service provider and contracting for enhanced resilience options or service levels offered by service providers. Exit strategies designed to guide transitions that occur over longer time periods may not be as useful as other tools for curing operational disruptions.

Consistent with the POR and revised PSMOR, outreach participants indicated that the third- and fourth-party risk management arrangements of banks should reflect strong governance and the integration of risk management in their due diligence processes. Participants noted that when using industry-wide consortia to support their risk assessment and due diligence efforts, banks should not outsource their risk management responsibilities. Participants further observed that appropriate business continuity and contingency planning procedures and exit strategies support banks' operational resilience in the event of a failure or disruption at a third party that would impact the provision of critical operations. As a related matter, it was agreed that banks' business continuity plans should assess the substitutability of third parties that provide services to a bank's critical operations and other viable alternatives that may facilitate operational resilience in the event of an outage at a third party, such as bringing the service back in-house. With respect to concentration risk, participants noted that banks should collaborate with service providers in planning for potential failures and developing appropriate options. The Committee will continue to carefully monitor banks' third- and fourth-party risk management and concentration risk-related arrangements as well as potential systemic risks arising from the concentration of services provided by specific entities.

Related Link: Press Release

Keywords: International, Banking, Operational Risk, Operational Resilience, POR, PSMOR, Systemic Risk, Third-Party Risk, Outsourcing Risk, Cloud Service Providers, Business Continuity, BCBS