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

A bank's risk team reviews its critical outsourced services. Five critical services are provided by vendors: Vendor A supplies 3 services, Vendor B supplies 1, and Vendor C supplies 1. Which of the following is the most appropriate interpretation for concentration risk?

Vendor A supplies three of five critical services, or 60%, so its failure would affect several critical functions simultaneously. The bank should evaluate how easily it could substitute the vendor and ensure contingency and exit arrangements are in place.

  1. AVendor A represents a concentration risk because 60% of critical services depend on one provider, so substitutability and contingency arrangements should be assessedCorrect
  2. BVendor A's concentration is acceptable because a larger vendor always has stronger resilience
  3. CConcentration risk applies only to the number of vendors, so three vendors means no concern
  4. DVendor B and Vendor C pose the greatest concentration risk because they supply the fewest services

Explanation

Vendor A supports 3 of 5 critical services, which is 60%. A failure there would hit multiple critical functions at once, so the bank should assess substitutability, exit feasibility and continuity. Vendor size does not remove the concentration exposure.

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