Four US financial regulators, including the Federal Reserve and the FDIC, issued new guidance on September 11 regarding third-party risk management. The proposed framework shifts from a uniform process-based approach to a principles-based model that allows institutions to calibrate oversight based on the actual risk of individual relationships.
Regulators highlighted that community banks face significant challenges due to high market concentration among core service providers. Because these vendors supply essential infrastructure for payments, account management, and lending, many banks lack the practical ability to switch providers, effectively creating a dependency-management issue rather than a simple vendor-management task.
The agencies identified specific business practices that hinder banks, including opaque pricing, complex billing, and undefined deconversion fees. These contractual barriers often force institutions to remain in suboptimal relationships, limiting their ability to manage risks effectively despite being held responsible for the infrastructure they use.
The regulatory statement emphasizes that while banks can outsource operational tasks, they cannot outsource their ultimate responsibility. Executives are now expected to evaluate not only the probability of vendor failure but also the operational cost of dependency when assessing third-party risks.
