The Cyber Resilience Challenge
Volume 11, Number 9
September 29, 2021
Advocacy News You Can Use
International standard setters and national-level regulators are rightfully placing an emphasis on cybersecurity, cyber resilience, information and communications technologies (ICT) risks, and ICT third-party providers. Further, they are focused on what the role of banks and credit unions will be in preparing for cyber-attacks and what their regulatory requirements are going to be moving forward. We have seen the Basel Committee issue its Principles for Operational Resilience and Risk and its Principles for the Sound Management of Operational Risk. The European Union is considering its Digital Operational Resilience Act. Estimates from the European Union (EU) indicate that the costs of operational incidents in its financial sector are as high as a staggering EUR 27 billion per year.
Credit unions know that cyber risks pose an enormous challenge and that many times the actors perpetrating attacks have unfair advantages and resources than an individual credit union, because they are either state-sponsored or state-supported, with resources far beyond those of an individual credit union. Yet credit unions will do their level best to counter attacks through the use of technology or by pooling their resources to gain larger economies of scale to help address all the risks. Because of that un-level playing field, not only is it incumbent on regulators to provide sufficient and proportional regulations, as well as flexibility for credit unions to be able to find these solutions; but governments and policy makers need to focus on their own role in thwarting the bad actors. They need to work on their own communications framework, their cooperation among authorities to address incidents and bad actors, and their oversight of third-party providers. The burden cannot all be placed on credit unions, and certainly the regulations cannot be such that they inhibit credit unions from doing what they do best-- serve their communities.
Basel Committee Focused on Cyber Resilience, Climate and Digitalization
In separate releases, the Basel Committee on Banking Supervision called for the following:
- Increased efforts to improve resilience to cyber threats
- the development of a common set of global sustainability standards in regards to climate-related financial risks; and
- A Discussion on the impact of digitalization of finance on the banking system.
To that end, the Basel Committee today published a newsletter calling on banks to improve their resilience to cyber threats noting the widespread adoption of measures to strengthen banks cybersecurity.
The Committee also noted efforts on climate-related financial risks resulting from the publication of a series of analytical reports on that subject in April. It is assessing the extent to which the current Basel framework adequately mitigates such risks.-Look for a set of related supervisory practices to be published for consultation later this year, which may include additional disclosure, supervisory and/or regulatory measures.
Finally, the Committee is looking at the impact of the ongoing digitalization and disintermediation of finance on the banking system, with an initial focus on retail banks. It is continuing to assess the supervisory challenges and risks in the competitive landscape for the provision of retail banking, including non-bank financial and technological institutions.
A copy of the press release can be viewed here.
Why this matters to your credit union: The three main areas of focus by the Basel Committee will be on cyber resilience, climate risks and digitazation. These areas are likely to see the most changes for credit union regulations over the next several years.
WOCCU Supports Early Intervention to Maintain Cooperative Structure During Resolution
World Council of Credit Unions (World Council) urged the International Association of Deposit Insurers (IADI) to ensure that supervisory authorities prioritize early intervention when resolving cooperatives. The comments came as part of a consultation by the IADI on its Guidance Paper on "Ways to resolve a financial cooperative while keeping the cooperative structure."
World Council supported most of the findings of the paper, specifically that , in most cases, financial problems at a cooperative depository institution can be addressed at an early stage through prompt corrective action measures, including capital building plans through increased earnings retention and/or issuance of capital shares and use of "Net Worth Restoration Plans." These methods allow a supervisor to prioritize maintaining the assets in a cooperative when resolution is necessary.
World Council emphasized that the use of these early intervention measures such as Net Worth Restoration Plans, “spinning down” by reducing assets, and supervisory contracts will help promote safety and soundness by helping prudential supervisors correct material weaknesses at financial cooperatives prior to the point of non-viability.
Finally, World Council urged emphasis on the concept that “demutualization” should only be considered in the rare situation where there are no other financial cooperatives in the jurisdiction that can absorb the problem institution even with supervisory financial assistance or state aid.
A copy of the letter can be viewed here.
Why this matters to your credit union: Early intervention gives a credit union that may be experiencing difficulties the ability to survive. Further resolution tools that allow and encourage a supervisor to allow the assets remain in the credit union system can only help to strengthen the credit union model.
BIS Reports on How COVID-19 Policy Measures Supported Lending
The Bank of International Settlements recently released a report entitled "Covid-19 Policy Measures to Support Bank Lending.” The report noted that in the wake of the COVID-19 fallout, policymakers enacted a wide range of measures to support the flow of credit. Some measures strengthened banks' lending capacity by preserving their capital and encouraging flexibility in loss accounting. Others, such as state-backed loan guarantees or funding for lending programs, incentivized banks to use their available capacity. It found that both types of measures contributed to lending growth. In particular, the report contained the following key takeaways:
- Since the start of the COVID-19 pandemic, policy measures have supported lending by enhancing banks' balance sheet capacity and creating incentives for banks to use this capacity.
- Strong balance sheets allowed banks to accommodate credit line drawdowns at the start of the pandemic, while subsequent policy measures supported further lending.
- Small and medium-sized enterprises, particularly those in sectors hard hit by the pandemic, expanded their borrowing by more in countries with more generous guarantee programs.
A copy of the report can be viewed here.
Why this matters to your credit union: This study helps with the understanding of which relief measures have been successful during the COVID-19 pandemic and may give indications as to which relief measures will continue to be used by supervisory authorities.
Andrew T. Price, Esq.