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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 supervisor wants to reduce systemic risk from financial institutions' reliance on a few large cloud and ICT providers. Which policy tool most directly addresses the fact that individual banks have limited leverage over these providers?

Direct oversight or designation of critical third-party providers by financial authorities is the most relevant tool. It addresses the weak bargaining power of individual banks over dominant providers and the systemic dependency, whereas capital, LTV or liquidity measures target different risks.

  1. ARaising each bank's countercyclical capital buffer
  2. BDirect oversight or designation of critical third-party providers by financial authoritiesCorrect
  3. CTightening loan-to-value limits on mortgage lending
  4. DRequiring banks to increase their holdings of high-quality liquid assets

Explanation

Individual banks often cannot negotiate audit or resilience terms with dominant providers, so authorities can directly oversee or designate critical third parties. Capital buffers, LTV limits and HQLA requirements address credit and liquidity risks, not provider dependency.

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