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FRM Part II · FRM Exam Part II · Digital Resilience and Financial Stability: The Quest for Policy Tools in the Financial Sector

A bank's critical payment processing runs on a single cloud service provider that also hosts the platforms of most of its peer banks in the same jurisdiction. A supervisor is most concerned about which type of risk arising from this arrangement?

The main concern is systemic concentration risk. When many banks depend on the same cloud provider, one outage or cyber incident at that provider can disrupt multiple institutions simultaneously, turning a single firm's operational problem into a threat to financial stability.

  1. ASystemic concentration risk, because one provider failure could disrupt many institutions at the same timeCorrect
  2. BBasel market risk, because cloud fees fluctuate with interest rates
  3. CIdiosyncratic credit risk of the bank's retail borrowers
  4. DModel risk in the bank's internal VaR engine

Explanation

Heavy reliance of many financial institutions on one cloud provider creates a common point of failure. An outage or cyber event at the provider can hit many firms at once, making it a system-wide concentration issue. The other options describe unrelated risk types.

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