Cybersecurity for Financial Services Providers: Key aspects to consider
Financial services have long been at the cutting edge of safety and industry-wide information exchange and collaboration. Nonetheless, cyber assaults on financial institutions’ market infrastructures have grown in frequency and sophistication, necessitating increasing security expenditures and a greater emphasis on mitigating and mitigating cyber risk. Parallel to these efforts, the financial industry, regulators, and government bodies have been enhancing general resilience and stability to avert a recurrence of panics like the financial crisis of a decade ago.
Despite substantial cyber expenditures, J.P. Morgan Chase had a severe data breach in 2013. According to a Cnn report, the data of 76 million homes—roughly 65 percent of all households in the United States—and seven million small companies were stolen. Financial services firms are fully aware of the issue and are actively battling cybercrime. Yet, hackers continue to siphon off large sums of money each year – US$4.2 billion in 2020 alone, per the FBI.
How do financial systems deal with cybersecurity vulnerabilities?
Increased leverage — that is, indebtedness – is associated with increased systemic vulnerability. Regardless of the source of the shock, those market players, positions, and banking firms with the most leverage tend to create the most contagion. With excessive strength, even a slight decrease in the value of resources may result in a rapid decline in the equity of financial institutions and their capacity to absorb the loss, culminating in financial hardship or bankruptcy.
Maturity and Safety Turnaround: Banking markets convert longer-term, riskier, and illiquid assets (such as the now-famous subprime mortgages) to safer, more liquidity positions (most obviously, money itself). During this transition process, a shock to the price of hazardous illiquid assets may result in financing withdrawals and contagion by forcing asset sales and, in the worst-case scenario, the collapse of key institutions and a systemic catastrophe.
The procyclical nature of the risk premium combines with leverage and maturity transformation to amplify asset price booms and crashes. For instance, declining asset prices reduce the value of borrowers’ collateral (i.e., their net worth) while increasing the cost of the loan (risk premiums and interest rates). This dynamic further depresses hazardous asset values by raising lender risk, resulting in a feedback cycle of decreased financing, more losses, and increased risk premia.
Challenges to Cybersecurity for Financial Institutions
Loss of Trust: The OFR adds that although assaults on consumer networks are common and have a little systemic effect, a “larger-reaching theft… may result in a broader loss of confidence.” It may not require a data breach to cause such a loss. Numerous assaults, including ATM breaches, takedowns of one or more especially trusted institutions, hacker-induced flashing crashes, the publication of incriminating emails from bankers or regulators, and account takeovers, may accomplish this. Whatever the catalyst, a severe enough loss of trust may result in a “run on the banks.”
Data Integrity: Cyber intrusions that directly alter or otherwise impair client or customer data quality may have systemic consequences, requiring the system to stop until any remaining incorrupt files can be restored. As many institutions discovered after recent cybercrimes such as WannaCry, restoration may take much longer than anticipated, resulting in loss of trust or other systemic consequences, especially for markets that process orders quickly.
Lack of (ICT) Substitutability: While OFR emphasizes the financial sector’s reliance on a few major hubs, this is also true of ICT. For example, a sizable (and growing) portion of the world’s computing and storage is concentrated in the hands of a few cloud providers; corporate IT companies are highly similar and run the same application software; all businesses rely on the same fundamental Internet protocols, such as TCP/IP or DNS; and local disasters frequently reveal unexpected physical interconnections by interrupting entire resiliency chains.
Financial sector firms must guarantee that rigorous procedures and appropriate controls are implemented and enlist the assistance of cybersecurity consulting partners. The objective must be to provide adequate security services and to adhere to data security and privacy regulations.
Financial institutions are the most often targeted sectors of cybercrime. Banks are where money is, and cybercriminals may benefit from extortion, theft, and fraud by targeting banks, while country and hacktivists can target the banking markets for ideologies leverage. Regulators are taking note and adopting new cyber risk measures to meet the increasing danger to the banks they regulate. The Advanced Technologies Program researches the development of cyber threats to the banking markets and legal and regulatory measures to fortify its defenses.