Better Markets filed a comment letter to the Basel Committee on Banking Supervision (Committee) on its proposed principles to improve banks’ resilience and their ability to manage third-party risks.

Why It Matters.As technology rapidly develops and our world becomes more dependent on it, banks’ dependency on outside, third-party service providers increases. Responsibly using third-party services can benefit the public by reducing the costs of banking services and providing banks a way to offer products and services that otherwise may not be feasible. However, risks to the public and the banking system increase when banks delegate their activities to third-party providers without proper oversight.

Recent fintech bankruptcies and scandals underscore the need for strong oversight and rules. The bankruptcies of fintech companies Synapse Financial Technologies, Inc., FTX Trading, Ltd., and Voyager Digital Holdings, Inc. have focused public attention on the risks to everyday customers who entrust their money to a fintech with the belief that the funds will be protected. Unfortunately, that is not always the case for third parties operating outside the regulatory perimeter.

What We Said. The Committee has proposed general principles for managing these risks, but further improvement is needed. Most importantly, the proposal should include and emphasize the role that national supervisors play in defining and enforcing these regulatory standards. National supervisors should include in their regulations specific enforceable standards for banks’ management of third-party risks. National supervisors should also take legal action to hold both banks and nonbanks accountable for legal violations associated with third-party arrangements to provide banking services. Lastly, national supervisors should require banks to publicly identify any and all third parties that are engaging in material amounts of deposit-taking, payments, or lending conducted on behalf of the bank.

Bottom Line. These changes will ensure more effective and transparent oversight of banks managing third-party risks and a more resilient banking system.