FRM Part II · FRM Exam Part II · Digital Resilience and Financial Stability: The Quest for Policy Tools in the Financial Sector
A central bank evaluates policy tools for digital resilience. Industry data show that 60 of 100 banks use the same cloud provider, and the provider is out for a period that exceeds each bank's recovery time objective. Banks individually have strong controls and each assess their own failure probability as low. Which conclusion best reflects the financial stability reasoning?
The joint impact on the 60 banks is a common shock that individual bank controls cannot remove, so sector-level tools such as critical third-party oversight and coordinated resilience testing are justified. Low individual failure probabilities understate systemic risk when dependence on one provider is shared.
- AStrong individual controls eliminate systemic risk, so no sector-level tool is needed
- BBecause the failure is a common shock, the joint impact on 60 banks is not reduced by individual controls, justifying tools such as third-party oversight and sector-wide testingCorrect
- CThe outage matters only if the 40 other banks also fail
- DIncreasing each bank's capital ratio is the only effective tool since outages are credit events
Explanation
Individual controls do not remove dependence on a shared provider; the outage hits 60 banks together, so correlation is the issue. Sector-level tools like critical third-party oversight, exit planning and joint testing address this. Capital alone does not restore service.
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