Outsourcing Arrangements
October 14, 1999
Circular No. 11193

To the Chief Executive Officers of all Bank Holding Companies, State Member Banks, U.S. Branches and Agencies of Foreign Banks, and Edge Corporations, in the Second Federal Reserve District:

The outsourcing of key banking activities to third party service providers is a strategic business solution that is increasingly being considered by financial institutions as they respond to a competitive marketplace. Last year, the Federal Reserve Bank of New York formed a team to identify issues and risks associated with the outsourcing of banking activities. The team interviewed a cross-section of Second District financial services institutions as well as service providers, management and process consultants, lawyers, and academics. Its findings are summarized in a paper, Outsourcing Financial Services Activities: Industry Practices to Mitigate Risks, a file available on our website.

The paper examines the variety of approaches that market participants have developed to mitigate outsourcing risk, and determines which of them constitute "sound practices." Senior management and others with responsibility for evaluating and managing outsourcing arrangements should find this paper useful as an overview of the relevant issues and a benchmark for internal efforts. Additional copies of the paper may be obtained from our website.

We are also planning an industry conference in early 2000 to more broadly discuss this topic; we will be sending you information once the details have been finalized.

Should you or your staff have any questions on this matter, please contact one of the paper's principal authors: Kausar Hamdani, Assistant Vice President, Joseph L. Galati II, Examining Officer, or Patrick Prickett, Senior Financial Analyst.