With the banking industry becoming increasingly reliant on third-party service providers, such as tech companies, global banking regulators are beefing their principles for managing these risks.
On Wednesday, the Basel Committee on Banking Supervision published a new set of principles on the sound management of third-party risk, which replaces its previous work on outsourcing that was adopted back in 2005.
While traditional outsourcing arrangements allowed banks to cut costs and improve operational efficiency, allowing banks to focus on their core activities, the increased digitalization of finance has shifted the significance of these arrangements and facilitated innovation. As a result, banks have become increasingly dependent on these external providers.
As such, the Basel Committee is beefing up its principles for managing these kinds of risks.
The principles aim to complement banks’ operational risk management efforts and strengthen their operational resilience, the committee said. It believes that managing the risk of these arrangements can enhance banks’ ability to “withstand, adapt to and recover from operational disruption and thereby mitigate the impact of potentially severe disruptive events.”
The group said the principles aim to “establish a common baseline for banks and supervisors for the risk management of third-party service provider arrangements,” while also maintaining flexibility to accommodate evolving practices and regulatory frameworks.
Looking ahead, the Basel Committee said it will continue to monitor the ongoing digitalization of finance and financial technology from a prudential perspective.