consultation discussion

Amid a growing reliance on technology in the banking sector, as well as the rise of fintech, global banking regulators are proposing new principles for managing third-party risk.

On Tuesday, the Basel Committee on Banking Supervision launched a consultation on a new set of standards for dealing with the management and oversight of banks’ outsourcing arrangements that aims to replace existing principles in this area, which pre-date the global financial crisis.

In 2005, policymakers adopted principles for supervising banks’ outsourcing activities. Acknowledging that the sector’s dependence on third-party service providers has expanded and evolved since, the Basel committee is proposing draft principles that aim to “address banks’ increasing reliance on third-party service providers due to the ongoing digitalization and rapid growth in financial technology.”

These trends have facilitated innovation and increased banks’ dependence on outside providers for a broader range of functions, the group noted.

The new principles are intended to replace the existing standards on outsourcing to reflect the evolving risks that have accompanied this shift. This includes increased supply chain risk and concentration risk, which represents a growing source of potential systemic risk, as the financial sector becomes increasingly dependent on a handful of tech firms.

The committee said it “seeks to promote a principles-based approach to improving banks’ operational risk management and operational resilience through effective third-party risk management.”

The proposed principles are also intended to integrate with the work of other international organizations setting standards in this area, including the International Organization of Securities Commissions’ principles on outsourcing and the Financial Stability Board’s tools for managing and supervising third-party risk.

“The principles focus on third-party risk management holistically and are technology-agnostic,” the Basel committee said in a document detailing the proposed principles. “They aim to promote international engagement, greater collaboration and consistency, with a view to reducing regulatory fragmentation and strengthening the overall operational resilience of the global banking system.”

The proposals are out for comment until Oct. 9.