The Basel Committee recently published a consultation on Principles for Sound Management of Third-Party Risk in the banking sector. The proposed principles are open for comment until October 9, 2024. They provide guidance to the financial institutions and supervisors regarding effective third-party risk management to withstand operational disruptions.

This consultation recognizes that continued digitalization of the financial services has led to an increased reliance on third parties for new service offerings. The Basel Committee emphasized that the increased reliance as well as the rising concentration risks requires an updated review of how these third-party risks are managed by financial institutions. There are 12 high-level principles offering guidance. They introduce the idea of third-party life cycle while also emphasizing key concepts such as criticality.

The principles complement and expand on the Financial Stability Board’s 2023 report, Enhancing third-party risk management and oversight. While the principles are primarily directed at large international banks and their supervisors, the Basel Committee specifically noted the benefits these principles offer smaller financial institutions and their supervisory authorities. They establish a common baseline for all supervisors that oversee and evaluate the risk management of third parties.

Notably, the principles follow a technology-neutral approach. The Basel Committee believes this will allow the principles to remain relevant as new technology emerges in the future. The Basel Committee suggests these principles can be applied to third party services involved in a broad array of technology such as artificial intelligence, blockchain technology and machine learning. 

Click here to read the full consultation.