Cyber Attacks Threaten Global Financial Stability

A growing concern among financial regulators and institutions is the potential for cyber attacks to disrupt global financial markets. A report released by the Committee on Payments and Market Infrastructures (CPMI) and the Board of the International Organization of Securities Commissions (IOSCO) highlights the risks posed by these types of attacks.

Risks Posed by Cyber Attacks

According to the report, a successful cyber attack could have devastating consequences for the financial system. It could lead to:

A loss of confidence in financial institutions
Widespread withdrawals
Potential triggering of a global economic crisis

The report notes that the shift towards greater adoption of technology in the provision of financial services has increased reliance on a few key third-party entities that provide proprietary technology solutions. These critical service providers could come under direct cyber attack themselves and propagate risks to their institutional clients from the financial sector.

Contagion Effects

The report also highlights the risk of contagion effects within the financial system, where impairment of business activities in one institution can:

Curtail its ability to process transactions
Post margins to its counterparties
Result in heightened liquidity and solvency risks among multiple financial institutions

Confidence Effects

Furthermore, the confidence effects of a cyber event can create systemic risks for the financial system. The impact of a loss of confidence can be difficult to estimate and predict, but it could lead to a self-fulfilling prophecy that overwhelms existing buffers or contingency measures.

Systemicity of Cyber Events

An accurate assessment of systemic risk impact of a cyber event would require:

An understanding of the nature of different cyber events
Identification of the relevant risk transmission channels

The report provided examples of approaches to differentiate and assess the systemicity of different types of cyber attacks, including those involving data damage.

Data Damage

Cyberattacks involving data damage can result in higher systemic risk. Financial institutions are particularly vulnerable to data damage, given the importance of data integrity in the financial sector.

Analysis of Cyber Risk to Financial Institutions

The report also described some approaches for monitoring and analyzing cyber risk in the financial sector, including tools and data. It illustrated how these approaches can be applied, focusing on Singapore as a case study.

Traditional Approaches

Traditional solvency stress tests, liquidity stress tests, and contagion risk analyses already capture some aspects of cyber risk to financial institutions. However, more comprehensive approaches are needed to fully assess the risks posed by cyber attacks.

Conclusion

In conclusion, the report highlights the urgent need for policymakers, regulators, and financial institutions to prioritize cybersecurity and develop robust strategies to mitigate the risks posed by cyber attacks.

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