Regulators Update Third-Party Risk Guidance
6/8/2023
‘Additional resources to assist banks in managing third-party risks will promote efficient and rigorous risk management practices.’
(Third) Party Time: On Tuesday, the Fed, FDIC, and OCC issued final joint guidance on third-party risk. The guidance, which replaces all previous recommendations from the agencies, covers all stages in third-party relationships: planning, due diligence, selection, contracts, monitoring, and termination. Fed Governor Christopher Waller said there has been a “commitment by the agencies to engage with community banks” in the effort, and that “additional resources to assist banks in managing third-party risks will promote efficient and rigorous risk management practices.” But Fed Governor Michelle Bowman, who declined to support the guidance, said “it does not provide the necessary clarity or supplemental tools to facilitate small bank implementation.”
Capital Building: A Wall Street Journal scoop, also involving the Fed, FDIC, and OCC, says the regulators plan to enforce stricter capital requirements for large banks in an effort to enhance the financial system’s resilience after recent bank failures. The changes could increase overall capital requirements by 20% on average at larger banks, with the most significant increases for “megabanks” with extensive trading businesses. Banks reliant on fee income might also face substantial capital increases. The move marks a shift from the Trump administration’s lighter regulatory approach and is expected to be the first of several steps. Institutions with at least $100 billion in assets may have to comply, in effect lowering the existing $250 billion threshold for the toughest rules.
Erasing Appraisal Bias: Six federal regulators have requested comment on a proposed rule that, as Vice President Kamala Harris put it, ”will require that financial institutions ensure that their appraisal algorithms are not biased [and] that they do not produce lower valuations for homes owned by people of color.” The proposed rule would require institutions involved in covered transactions to adopt policies, practices, procedures, and control systems that adhere to quality control standards. These standards aim to ensure high confidence in automated valuation models (AVM) estimates, protect against data manipulation, avoid conflicts of interest, require random sample testing and reviews, and promote compliance with applicable nondiscrimination laws.
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