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FRM Part II · FRM Exam Part II · Guidance on Managing Outsourcing Risk

A bank's outsourcing risk management program classifies its service providers into tiers. Which feature most appropriately determines whether a provider is placed in the highest-risk (critical) tier?

A provider belongs in the critical tier based on the potential impact of its failure or poor performance on the bank's operations, customers, finances and regulatory compliance. Fee size, relationship length or location do not define criticality, though they may inform the overall risk assessment.

  1. AThe annual fee paid to the provider
  2. BThe number of years the provider has served the bank
  3. CThe potential impact on the bank's operations, customers and compliance if the provider failed or performed poorlyCorrect
  4. DWhether the provider is located in the same country as the bank

Explanation

Criticality is driven by potential impact of failure on operations, customers, finances and regulatory compliance. Fees, tenure and location may be inputs but are not the defining measure of criticality.

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