Bank regulators propose third-party risk guidance and widen the 18-month exam cycle

The federal banking agencies are seeking comment on proposed third-party risk management guidance, and have issued a statement on community bank engagement with core service providers¹. American Banker reported that the Federal Reserve Board of Governors voted six to one to issue the proposed guidance³. Governor Michael Barr was the lone dissent³.

Barr opposed the proposal, citing concerns over the standard for material financial risk⁴. Separately, the agencies moved to reduce regulatory burden for community banks and to increase eligibility for the 18-month examination cycle². Newsquawk reported that the Federal Reserve, the OCC and the FDIC were said to be increasing the number of banks eligible for that longer cycle⁸.

Why it matters to investors

Core providers are the small number of vendors that run the ledger, payments and account systems for most community banks. Concentration there is a systemic question dressed as a procurement question, and the agencies have now pledged more scrutiny of core provider business practices⁵. That is the part of the package aimed at the vendors rather than at the banks.

The other part runs the opposite way. The OCC has proposed lighter third-party rules for community banks, shifting oversight from blanket rules to risk-based standards, with Comptroller Jonathan Gould saying the plan cuts regulatory burden⁶. A longer examination cycle works in the same direction, lowering the recurring supervisory cost carried by smaller institutions². Taken together, the agencies are tightening on vendors while loosening on the banks that buy from them.

What to watch

Barr’s objection is the substantive one to follow, because the material financial risk standard he questioned is what determines which relationships fall inside the guidance at all⁴. A single dissent from a board that otherwise voted to issue the proposal does not block it, but it marks the line along which comment letters will be written³.

The comment period on the third-party guidance is the next formal step, and the agencies have asked for input rather than finalised a rule¹. Beyond that, the Office of the Comptroller of the Currency has set out a broader community bank agenda, including increasing the upper asset range of its community bank supervision, in material featuring Treasury Secretary Scott Bessent and Comptroller Jonathan V. Gould⁷. Whether core providers change their practices under the new scrutiny is the outcome that would actually move costs^5,6.