The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency released a guide on May 03, 2024, to support community banks in managing risks presented by third-party relationships. The guide offers potential considerations, resources, and examples through each stage of the third-party relationship and may be a helpful resource for community banks.

 

Community banks can identify, assess, monitor, and control risks associated with third-party relationships through the following key steps:

1. Risk Assessments: Risk assessments are crucial to evaluate the extent of risk-management resources and practices for effective oversight of third-party relationships throughout their life cycle. This helps in understanding the risks involved before entering into a relationship.

2. Documentation and Reporting: Banks must accurately assess the resources required to manage third-party risks, maintain an inventory of relationships, and ensure board oversight through documentation and reporting.

3. Governance and Oversight: Effective governance structures, internal controls, and periodic independent reviews are essential to evaluating risk and performance reporting, informing the board of directors about risks, and holding management accountable for third-party risk management.

4. Strategic Planning and Alignment: Banks should align their strategic plans with risk appetite, assess existing relationships for support, evaluate technology integration readiness, and consider financial implications through cost-benefit analysis.

 

Key considerations for community banks during the stages of the third-party relationship life cycle include:

1. Risk Management: Community banks need to apply more rigorous risk-management practices throughout the third-party relationship life cycle, considering the varying levels of risk associated with different relationships. This involves identifying, assessing, monitoring, and controlling risks related to third-party relationships.

2. Ongoing Monitoring: Community banks should pay particular attention to third-party relationships that support higher-risk activities, including activities that could significantly impact the bank if the third party fails to meet expectations. Risk-management practices must be adjusted based on the bank's size, complexity, and risk profile.

3. Oversight and Accountability: Governance practices such as Oversight and Accountability, Independent Reviews, and Documentation and Reporting play a crucial role in managing third-party relationships effectively. The level of oversight should be commensurate with the bank's characteristics and the specific nature of each relationship.

4. Practical Planning: Before entering a third-party relationship, community banks should conduct risk assessments and evaluate how to manage the risks associated with the proposed relationship. This includes considerations such as integrating technology, the roles of both parties, and the necessary skill sets within the bank.

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Governance practices such as oversight, independent reviews, and documentation support effective third-party risk management in community banks by:

1. Oversight and Accountability: The board of directors of a community bank provides oversight for third-party risk management and holds management accountable, ensuring consistent oversight.

2. Independent Reviews: Periodic independent reviews assess the adequacy of third-party risk management processes, allowing adjustments to policies, reporting, resources, expertise, and controls based on review results.

 

Documentation and Reporting: Proper documentation enables the bank to maintain a current inventory of all third-party relationships, evaluate risk and performance reporting accuracy, and effectively inform the board of directors about third-party risks.