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

A regional bank relies on a single cloud provider to host its payment processing platform. The provider suffers a prolonged outage, and the bank cannot process customer payments for two days. Which risk concept does this event best illustrate?

The event illustrates concentration risk from dependence on a single third-party provider. Because the bank's payment processing relied entirely on one cloud vendor, one outage halted a critical service, showing the lack of diversification or substitutability in the outsourcing arrangement.

  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 delivery-versus-payment failure
  4. DModel risk arising from incorrect parameter calibration

Explanation

The bank's critical service depended on one provider, so a single failure disrupted a key function. This is third-party concentration risk. The other options relate to hedging, settlement mechanics or models, none of which describes the dependence.

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