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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 regional bank migrates most of its core payment processing to a single cloud provider to cut costs. From a financial stability perspective, which risk is most directly increased by this decision when many other institutions make the same choice?

Concentration risk is most increased. When many institutions depend on the same cloud provider, one operational failure or cyber incident there can disrupt multiple firms simultaneously, turning an idiosyncratic outage into a systemic event that threatens financial stability.

  1. AConcentration risk, because a failure at the shared provider could disrupt many institutions at onceCorrect
  2. BBasis risk, because cloud pricing may diverge from interest rate benchmarks
  3. CPrepayment risk, because customers may repay loans faster
  4. DSettlement netting risk, because cloud systems prevent multilateral netting

Explanation

Widespread reliance on a small number of third-party technology providers creates concentration and common-mode dependency, so one outage can propagate across the sector. The other options describe risks unrelated to cloud adoption.

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