Basel may advise banks on outsourcing

The Basel Committee on Banking Supervision may investigate the risks associated with outsourcing trading systems to third parties, a senior Bank for International Settlements (BIS) official told RiskNews ' sister publication, FX Week .

"Cross-border outsourcing is increasing rather rapidly and this can mean increased risks," said the official, who did not wish to be named. This is one of the key issues likely to be considered in the context of electronic banking and risk management, he added.

This follows papers from the Basel Committee on Banking Supervision on the management and supervision of cross-border electronic banking activities, which were released earlier this month. The guidance primarily targets the retail sector, but the principles could also be applied in the capital markets, said the official. The papers aim to provide guidance to promote safety in electronic banking activities.

The first paper identified 14 risk management principles for electronic banking, to help banking institutions expand their existing risk oversight policies and processes to cover online banking. The second identified risk management principles specific to cross-border electronic banking. It also stressed the need for effective home country supervision as well as ongoing international co-operation between banking supervisors regarding such activities.

"In certain areas, such as the management of outsourcing relationships, security controls and the management of legal and reputational risk, the characteristics of the internet distribution channel call for more detailed principles than those expressed to date," said the paper. "We expect bankers to be mindful of the need to have in place adequate risk management processes, provide adequate disclosures to customers, and, in the case of cross-border activities, conduct appropriate risk assessment and due diligence."

But any decision on outsourcing and so-called ‘cyber security’ will probably be made after Basel II capital Accord has been finalised.