Like the ancient courtier Damocles who had a sword dangled over his head, banks are in a precarious position. Regulators can and do fine banks who fail to manage the risk posed by third party vendors. This article is a guide for boards wanting to implement a successful vendor management program. Background The economics underlying modern banking necessitate that certain operational functions be outsourced to non-bank entities. The prudential regulators recognize the benefits and efficiencies provided by third-party vendors—reduced costs, new product offerings and enhanced performance—but they also bemoan the inherent problems. To combat the risks caused by outsourcing, regulators...