Washington March 4 2023: Cyber attackers continue to target the financial sector, says International Monetary Fund in its recently published report.
Tight financial and technological interconnections within the financial sector can facilitate the quick spread of attacks through the entire system, potentially causing widespread disruption and loss of confidence. Cybersecurity is a clear a threat to financial stability.
Among emerging market and developing economies, most financial supervisors haven’t introduced cybersecurity regulations or build resources to enforce them, according to a recent IMF survey of 51 countries.
- 56 percent of the central banks or supervisory authorities do not have a national cyber strategy for the financial sector.
- 42 percent lack a dedicated cybersecurity or technology risk-management regulation, and 68 percent lack a specialized risk unit as part of their supervision department.
- 64 percent do not mandate testing and exercising cyber security measures or provide further guidance.
- 54 percent lack a dedicated cyber incident reporting regime.
- 48 percent do not have cybercrime regulations.
Meanwhile, a Bank for International Settlements assessment of 29 jurisdictions identified shortcomings in the oversight of financial markets infrastructures.
There are, however, defenses against these risks, including preparation and concerted regulatory action, as we discussed at our recent global cybersecurity workshop in Washington. It won’t be easy though, and comprehensive and collective responses are urgently needed.
Just as rapid technological advances offer attackers tools that are cheaper and easier to use, so too do the changes give financial institutions greater ability to thwart them.
Even so, greater vulnerabilities are to be expected in an increasingly digitalized world. Targets proliferate as more systems and devices are connected. Fintech firms that rely heavily on new digital technologies can make the financial industry more efficient and inclusive, but also more vulnerable to cyber risks.
The escalation of geopolitical tensions has also intensified cyberattacks. Perpetrators and their motivation are often obscure, and the risks are not limited to regions of conflict. History shows that spill-over of disruptive malware can cause global damage. For instance, the NotPetya malware attack that first swamped the IT systems of Ukrainian organizations in 2017 quickly spread to several other countries and caused damages estimated at more than $10 billion.
Finally, reliance on common service providers means attacks have a higher probability of having systemic implications. The concentration of risks for commonly used services, including cloud computing, managed security services, and network operators, could impact entire sectors. Losses can be high and become macro critical.
While financial firms and regulators are becoming more aware of, and prepared for, attacks, gaps in the prudential framework remain substantial.
Neutralizing the threat
Financial institutions and regulators must prepare for heightened cyber threats and potential successful breaches by prioritizing five things:
- Central banks, regulators, and financial firms must develop a cybersecurity strategy. Cyber risk is a multi-dimensional issue that requires sound security within authorities; robust oversight through regulation and supervision; collective action within the market; and efforts to build capacity and expertise.
- Financial regulators and firms need to shift their focus from classic business continuity and disaster recovery planning, to delivering critical services even when attacks disrupt normal operations. Resilience requires buy-in from the top leaders of companies and financial regulators and their board members. Firms need to prepare for severe but plausible incidents that can have a systemic impact. Supervisors should require the industry to consider such adverse scenarios and test their contingency plans both individually and collectively.
- Financial supervisors need to ensure that cyber regulation and supervision can effectively promote resilience. There is no one-size-fits-all approach, but many elements are common. An effective supervisory approach balances onsite and offsite activities, performed by a mix of security experts and generalist supervisors, who enforce regulation in a proportional manner.
- Financial firms must strengthen cyber “hygiene,” secure-by-design systems, and response and recovery strategies. While many of today’s attacks are increasingly sophisticated and rely on social engineering to get a victim to provide sensitive information, most successful attacks are the result of routine lapses—such as failing to deploy patch updates or make the correct security configurations. In this context, habitual practices for ensuring the safe handling of critical data and for securing networks makes all the difference.
- The international community must harmonize cyber incident reporting and effective information sharing to ensure authorities around the world can manage incidents effectively. The model for incident reporting and the common lexicon being developed by the Financial Stability Board are important steps forward.
The strength of cyber defenses depends on the weakest link. With growing interconnections across the world, curbing risk requires an international effort. For its part, the IMF continues to help financial supervisors through capacity development initiatives aimed at designing and implementing international standards and best practices as an urgent priority.