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FRM Part II · FRM Exam Part II · Guidance on Managing Outsourcing Risk

Several banks in a jurisdiction each use the same cloud provider for core processing, though each bank individually has only moderate dependence. Which risk is most directly raised from the perspective of the financial system and supervisors?

Concentration risk is raised. When many banks depend on the same cloud provider, one outage or failure can disrupt them all at once, making the provider a systemic single point of failure even if each bank's own dependence appears moderate.

  1. AConcentration risk, because a single provider failure could simultaneously disrupt many institutionsCorrect
  2. BBasis risk between the banks' hedging instruments
  3. CSettlement risk arising from time zone differences
  4. DModel risk in the banks' credit scoring systems

Explanation

Common reliance on one provider creates a single point of failure across institutions, which is concentration risk at the sector level. The other risks relate to different mechanisms and are not driven by shared service provider dependence.

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