How outsourcing raises US banks' operational risks

Raising concerns over American banks' outsourcing their work, a US watchdog has said that engaging with foreign as well as domestic third-party entities exposes lenders to increased operational and strategic risks.

Many Indian companies provide outsourcing services to various American entities, including large banks and financial institutions.

Providing a guidance for the country's national banks and federal savings associations, the Office of the Comptroller of the Currency has said that there are concerns about risk management quality when jobs are outsourced by such entities.

"The guidance notes that banks face new or increased operational, compliance, reputation, strategic, and credit risks when engaging in third-party relationships," it said.

Third-party relationships include business arrangements between the bank and another entity, including by contract.

OCC, under the US Treasury Department, has the responsibility of regulating and supervising national banks, federal savings associations as well as branches and agencies of foreign banks.

"We have concerns regarding the quality of risk management on the growing volume, diversity, and complexity of banks' third-party relationships, both foreign and domestic," Comptroller of the Currency Thomas J Curry said in a statement on Wednesday.

He also emphasised that banks should ensure that their relationships with third parties should be conducted in a ‘safe and sound manner’.

Global banks outsourcing key oversight jobs had come under the scanner of American authorities in the past. Last year, the US Senate's Permanent Committee on Investigations had found major lapses in the work of HSBC's India staff.

Besides, a probe by the New York State's Department of Financial Services last year had found deficient money laundering controls in outsourcing of work by StanChart to India.

According to OCC statement, the use of third parties does not diminish the responsibility of the board and management to ensure the activity conforms to safe and sound banking practices and complies with applicable laws.

The regulator has advised banks to various risk management processes in addition to more comprehensive oversight and management of third-party relationships that involve critical bank activities.

OCC has suggested that banks should develop a plan that includes details about how the bank will select, assess, and oversee the third party apart from negotiating ‘written contracts that clearly outline the rights and responsibilities of all parties’.

Further, the watchdog has stressed the need to maintain proper documentation and reporting to facilitate oversight, accountability, monitoring and risk management.

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