(Finance) – The increase in service interruptions such as the one that hit companies around the world today will intensify regulatory focus on operational resilience for critical services and will lead to tougher demands on the management and oversight of critical third-party risks, said Monsur Hussain, head of Financial Institutions research at Fitch Ratings.
The full story will no doubt materialize in time, but authorities such as the Financial Stability Board have long warned that the increasing dependence on third-party service providers for critical assets could lead to risks to financial stability if not properly managed, for example, due to a cross-border technical problem by a major IT service provider.
“In recent years, financial institutions’ dependence on third parties has increased as part of the ongoing digitalisation of the sector,” explains Hussain. “Economies of scale are compelling, but they can also lead to systemic risks“.
According to the expert, there are advantagesincluding flexibility, innovation and less reliance on legacy systems, but disruptive events by a vendor can lead to the failure of critical services, such as the inoperability of bank accounts or transaction services. As institutions continue to migrate from reliable but outdated systems in favor of cloud-based alternatives, the impact of a potential cross-border failure of a systemic operator will be a serious concern for supervisory authorities.
“We expect the authorities to push for coordination and global collaboration to subject critical service providers to some oversight – Fitch’s analysis reads – However, this will prove difficult, as oversight will most likely fall instead on regulated institutions, depending on their business models, complexity, risk profile, scale and, ultimately, size”.
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