Vendor Risk Management: The Weakest Link in Regional Bank Security?

Vendor risk management has rapidly emerged as a critical concern for regional banks and credit unions in 2025, as third-party breaches and regulatory scrutiny intensify. Here’s an in-depth look at why this issue is now considered the “weakest link” in the cybersecurity chain — and what financial institutions can do about it.

The Scope of the Problem: Third-Party Breaches on the Rise

Recent data shows that 35.5% of all breaches in 2024 were third-party related, with nearly half of ransomware attacks now starting through vendor access points. High-profile incidents, such as the Western Alliance breach that exposed sensitive data of 22,000 customers via a third-party file transfer vulnerability, underscore how vendor weaknesses can have direct, damaging impacts on regional banks. Even industry giants like Bank of America and American Express have suffered data exposures due to vendor mishaps, highlighting that no institution is immune.

Why Are Vendors Such a Risk?

Expanded Attack Surface

As banks increasingly rely on cloud providers, fintech partners, and outsourced IT, each vendor relationship becomes a potential entry point for cybercriminals.

Resource Constraints

Most regional banks and credit unions run lean TPRM (third-party risk management) teams — 73% have two or fewer full-time staff managing hundreds of vendors — making comprehensive oversight a challenge.

Complexity and Diversity

Not all vendors pose equal risk, and critical service providers (those handling sensitive data or core operations) require deeper scrutiny.

Regulatory Pressure

Examiners from the Federal Reserve, FDIC, and OCC are now prioritizing vendor management, expecting banks to demonstrate robust oversight throughout the vendor lifecycle — planning, due diligence, contracting, monitoring, and termination.

Common Weaknesses in Vendor Risk Management Programs

• Incomplete Vendor Inventories: Many institutions lack a centralized, real-time inventory of all vendors and their associated risks.

  
  

• Generic Due Diligence: Using “one-size-fits-all” checklists fails to capture unique vendor risks, especially for those with access to sensitive data or critical systems.

  
  

• Periodic, Not Continuous, Monitoring: Annual reviews are no longer sufficient; real-time monitoring is essential to catch emerging threats before they escalate.

  
  

• Weak Offboarding Controls: Data breaches have occurred even after vendor contracts end, due to poor data deletion and monitoring practices.

  
  

• Communication Gaps: Misalignment on security expectations and lack of regular updates can lead to compliance failures and increased risk.

Every vendor relationship is a potential gateway — strong oversight is the key to keeping your institution secure and compliant.

Regulatory Expectations and Best Practices

Regulators now expect banks to:

• Tailor Due Diligence: Match the depth of vendor assessment to the risk and complexity of the relationship.

• Negotiate Strong Contracts: Clearly define roles, responsibilities, and risk-sharing mechanisms in vendor agreements.

• Engage in Ongoing Oversight: Implement structured, ongoing monitoring of vendor performance and emerging risks, including operational, reputational, and compliance issues.

• Plan for Exit: Have robust termination procedures to ensure data is secured or destroyed and access is revoked.

• Integrate with Enterprise Risk Management: Align vendor risk management with broader internal controls and risk frameworks, such as COSO.

Action Steps for Regional Banks & Credit Unions

• Automate Vendor Inventories: Use tools for real-time tracking of all vendors and their risk profiles.

• Implement Continuous Monitoring: Move beyond periodic assessments to real-time, AI-driven monitoring of high-risk vendors.

• Tier Vendors by Risk: Focus resources on those vendors that present the highest potential impact.

• Strengthen Offboarding: Ensure data deletion and access revocation are part of every vendor exit process.

• Foster Collaboration: Establish cross-functional VRM committees with IT, compliance, procurement, and legal stakeholders.

• Communicate Regularly: Keep vendors updated on evolving security requirements and expectations.

• Work with a vCISO or fractional CISO: These experts can help you navigate the maze of risk and regulatory compliance, ensuring that all aspects of your security are addressed.

Wrapping It Up

As third-party breaches surge and regulatory scrutiny mounts, vendor risk management is no longer a “check-the-box” exercise — it’s a strategic imperative. Regional banks and credit unions that invest in robust, real-time vendor oversight will be best positioned to protect their customers, reputations, and bottom lines in an increasingly interconnected financial ecosystem.