A Closer Look at the Interagency Third Party Risk Management Guidance

bank owner performing bank risk management

How many third-party vendors have you used since starting work today? Since the rise of technology, third-party vendors have become an integral part of every bank. They provide various services such as IT solutions, payroll processing, and more. However, with their increasing use comes a greater risk for organizations—your organization.

A collection of bank risk management agencies recently released an Interagency Guidance for Third Party Risk Management. You know that these guidelines impact your bank but you might not be sure what changes to make, if any. So, let’s take a closer look at what this guidance means for your bank.

An Ever-Changing Regulatory Landscape—The Rise of Cybersecurity and Bank Risk Management

The Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) each had separate guidance on third-party risk management. However, these guidelines varied in terms of scope and depth.

To address this issue, the agencies collaborated to release interagency guidance on third-party bank risk management. This document was released in June 2023 and combines the strengths of each agency’s previous guidance to provide a unified framework for managing third-party relationships.

Exploring Regulatory Requirements

One of the primary pillars of the Interagency Third Party Risk Management Guidance involves a deep dive into the regulatory requirements that underpin third-party oversight. 

In a world characterized by increasingly stringent regulations, banks must remain compliant with guidelines and standards that protect consumers and the financial system as a whole. The guidance provides clarity on these regulations, helping banks understand and fulfill their obligations.

Developing a Third Party Risk Assessment

Understanding and mitigating risks are at the heart of effective risk management. The Interagency guidance highlights the need for a structured risk assessment process for third-party relationships. 

This assessment identifies vulnerabilities and enables banks to create strategies to mitigate potential issues, ensuring a proactive approach to risk management.

In a financial landscape where partnerships and alliances are integral to success, understanding the principles and recommendations outlined in the Interagency Third Party Risk Management Guidance is crucial.

Risk Ratings 

Depending on the data classification of the third-party you’re working with, you’ll want to rate the amount of risk that partnership poses. Consider factors such as the nature of services provided, the vendor’s access to sensitive data, and their criticality to your operations. These ratings typically range from low to high risk and are a foundational component of effective risk management.

By assigning risk ratings to your third-party vendors, you can better allocate resources and attention to those relationships that pose higher risks to your organization. This proactive approach enables your bank to address potential issues before they escalate into significant problems, ultimately safeguarding your financial stability.

The Connection Between Risk and a Business Impact Analysis

A Business Impact Analysis is a comprehensive assessment that delves into the potential consequences of disruptions caused by third-party vendors.

In light of the Interagency Guidance, this connection between risk and a BIA becomes even more critical. By conducting a BIA, your bank can identify how each third-party vendor influences your operations and, subsequently, your risk exposure.

A well-executed BIA can reveal the cascading effects of disruptions, helping you understand the extent to which a third-party’s failure can impact your organization. This knowledge empowers your bank to prioritize risk management efforts more effectively, ensuring that the most critical relationships receive the attention they deserve.

Vetting Your Vendors Recovery Strategies

When vetting your vendors, one critical question that often goes unasked is about their guaranteed Recovery Time Objectives (RTOs). RTOs define the maximum allowable downtime for a system or service. 

Understanding the RTOs of your vendors is essential, as it enables you to align their recovery capabilities with your own and, more importantly, your customer’s expectations. If a vendor’s RTOs do not align with your bank’s operational requirements, it can introduce vulnerabilities and disrupt your services during contingencies.

The impact of poorly chosen vendors on a bank’s risk profile cannot be overstated. Neglecting to vet vendors’ recovery strategies leaves your institution exposed to undue risk. By incorporating vendor recovery capabilities into your risk assessment process, you can make more informed vendor choices and strengthen your overall risk management framework. 

A Banking Expert’s Insight: RESULTS Technology

If you find yourself grappling with the nuances of third-party risk management, you’re not alone. This is a complex and evolving field. To answer any questions you may have, speak with a bank risk management expert like RESULTS Technology.

Get to know your IT infrastructure and how it impacts compliance with help from our experienced team. We have extensive experience working with banks and can provide invaluable guidance to help you navigate the complexities of third-party risk management. Schedule a free consultation and get the help you need.