The Federal Reserve and fellow federal banking agencies announced they are seeking public comment on proposed third-party risk management guidance and have issued a statement addressing how community banks engage with core service providers. The announcement came from the Federal Reserve, which said the agencies are opening the proposed guidance to industry and public feedback while simultaneously issuing a separate statement aimed at community bank relationships with the vendors that run their core systems.
Neither the Federal Reserve's announcement nor the accompanying statement spelled out the specific contents of the proposed guidance, the comment deadline, or which agencies besides the Fed are involved. A comment period on federal banking guidance typically runs for 60 to 90 days after publication in the Federal Register, though that detail was not confirmed in the Fed's notice.
The Stakes for Community Banks
Community banks have become increasingly dependent on a handful of outside vendors for their core processing, online banking, payment systems, and cybersecurity infrastructure. Those core service providers — companies that handle the back-end technology most banks cannot build in-house — have consolidated over the past two decades, leaving thousands of small and mid-sized institutions with limited choices and little leverage in contract negotiations.
The problem is not theoretical. When a core provider suffers an outage, a ransomware attack, or a botched software migration, the banks that depend on it absorb the reputational and financial damage. Customers do not blame the vendor — they blame their local bank. In recent years, several high-profile outages at major core processors have locked customers out of accounts and disrupted direct deposits for days.
That dynamic is what the community bank statement appears intended to address. Whether it gives small banks practical tools — or just more paperwork — depends entirely on what the final guidance says. The Fed's announcement did not describe what the statement tells community banks to do differently.
Who This Actually Touches
Third-party risk management guidance sounds like inside-baseball regulation, but it reaches every American who has a checking account, a mortgage, or a small business line of credit at a community institution. When regulators tighten vendor oversight expectations, banks must document, audit, and monitor their outside providers more aggressively. Those compliance costs hit small banks harder than megabanks, which have entire departments dedicated to vendor management.
There is also a competitive angle. If community banks cannot keep pace with third-party risk requirements, the rational move becomes selling out to a larger institution — the same consolidation trend that has already cut the number of federally insured banks roughly in half since 2000. That outcome would leave rural and small-town customers with fewer local lending options and less say over how their money is handled.
What Happens Next
The public comment process is the one point where community bankers, trade associations, and individual customers can push back before guidance becomes binding exam expectations. Trade groups representing community banks have historically used these windows to argue for tiered requirements that scale with an institution's size and complexity rather than one-size-fits-all mandates.
It is not yet known how long the comment window will remain open, what the specific guidance proposes, or whether the agencies will publish the comments they receive. Those details will likely surface when the proposal is formally published in the Federal Register.
Our Take
Here we go again. The Fed and its fellow agencies want to sound helpful — look, we're issuing a statement to help the little guys! — but the pattern is familiar. Every new layer of federal guidance lands hardest on the institutions least able to absorb it. Community banks did not create the risk; the billion-dollar tech vendors and their consolidated back-end systems did. Now your local bank gets to hire a compliance officer and fill out more forms while the megabanks shrug it off as a line item.
And notice what the announcement does not say: it does not promise to hold core service providers directly accountable, it does not threaten penalties for vendor failures that lock customers out of their accounts, and it does not address the real problem — too few providers controlling too much infrastructure. If the agencies are serious about protecting consumers, they should scrutinize the vendors, not bury the community banks in mandates that accelerate consolidation.
The public comment period is a real opportunity. If you bank with a community institution, pay attention to what your bank's trade association says during this window. And ask yourself: bailing out failing institutions didn't come cheap last time. So why should the community banking sector pay the price for the next round?
