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FRM Part I · FRM Exam Part I · Operational Risk

After a major loss, a bank decides to outsource its payment processing to a third-party vendor to reduce operational risk. Which statement best describes the risk implication under sound risk management practice?

Outsourcing swaps internal process risk for third-party risk, and the bank remains accountable. It must still perform due diligence, monitor service levels and maintain contingency plans, because reputational and regulatory responsibility cannot be fully transferred to the vendor.

  1. AOperational risk is fully transferred to the vendor and the bank has no residual responsibility
  2. BOutsourcing replaces internal process risk with third-party risk, and the bank remains accountable for oversightCorrect
  3. COutsourcing eliminates legal and reputational risk but increases credit risk
  4. DOutsourcing is only permissible if the vendor holds regulatory capital on the bank's behalf

Explanation

Outsourcing changes the risk profile but does not remove accountability; the bank must do due diligence, set service level agreements, monitor performance and plan for exit. Reputational and regulatory responsibility stays with the bank, so the full-transfer claim is wrong.

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