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FRM Part II · FRM Exam Part II · Case Study: Third-party Risk Management

A mid-sized bank relies on a single cloud provider to host its payment processing platform. The provider suffers a multi-day outage, and the bank has no tested exit or substitution plan. Which risk is most directly illustrated by this exposure?

The exposure is concentration risk. The bank depends on one third-party provider for a critical service and lacks a tested exit or substitution plan, so a single provider failure can halt payment processing for several days.

  1. AConcentration risk arising from dependence on a single third-party providerCorrect
  2. BBasis risk arising from mismatched hedging instruments
  3. CSettlement risk arising from delayed securities delivery
  4. DModel risk arising from an incorrectly calibrated pricing model

Explanation

Reliance on one provider for a critical service, with no substitution or exit plan, creates concentration risk in the supply chain. The other risks relate to hedging, settlement or models and are not the source of the outage exposure.

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