Basel Committee shifts gears, proposes third-party oversight principles

New principles published following OSFI's capital rules delay

Basel Committee shifts gears, proposes third-party oversight principles

The Basel Committee on Banking Supervision has proposed new principles for managing risks associated with third-party relationships after Canada’s banking regulator delayed implementing tighter capital requirements.

The committee has published a consultative document suggesting new "principles for the sound management of third-party risk." This announcement comes a day after the Office of the Superintendent of Financial Institutions (OSFI) postponed the implementation of new capital floor levels for banks by one year.

The delayed regulations are part of the international Basel III accords and would have required Canadian banks to use a standardized model to assess more risks in their loan books instead of relying on internal methods.

Read more: OSFI postpones stricter bank capital rules

The Basel Committee's document includes 12 high-level principles designed to guide banks and supervisors in managing and supervising risks arising from third-party arrangements. These principles introduce the concept of a third-party life cycle and emphasize criticality, proportionality, supply chain risk, and concentration risk.

The document also addressed supply chain and concentration risks and stressed the importance of supervisory coordination across sectors and borders.

“Ongoing digitalisation has led to rapid adoption of innovative approaches in the banking sector,” the committee wrote in a release. “As a result, banks have become increasingly reliant on third parties for services that they had not previously undertaken.

“This increased reliance on third parties beyond the scope of traditional outsourcing, coupled with the expansion of supply chains and rising concentration risks, has necessitated an update to the 2005 joint forum paper outsourcing in financial services, specifically for the banking sector.”

While primarily targeted at large international banks and their prudential supervisors, the principles are designed to benefit smaller banks and authorities in all jurisdictions.

The committee noted that these guidelines "establish a common baseline for banks and supervisors for the risk management of third parties while providing the necessary flexibility to accommodate evolving practices and regulatory frameworks across jurisdictions."

The principles maintain a technology-neutral stance that applies to a wide range of technologies, including recent trends like artificial intelligence, machine learning, and blockchain.

The Basel Committee is accepting comments on the proposed principles until October 9. All submissions will be published on the Bank for International Settlements website unless confidentiality is specifically requested.

The Basel Committee, chaired by Erik Thedéen, Governor of the Sveriges Riksbank, is the primary global standard setter for prudential bank regulation. It reports to the Group of Central Bank Governors and Heads of Supervision, chaired by Tiff Macklem, Governor of the Bank of Canada.

The committee’s mandate is to strengthen banks' regulation, supervision, and practices worldwide to enhance financial stability. Although it has no formal supranational authority, it relies on its members' commitments to achieve its mandate.

Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.