Blog

Cyber crime the fastest growing threat to FIs

July 23, 2013 by Jim Ghiglieri — Senior Vice President, Corporate Communications, SHAZAM

In the past, cyber terrorists have focused primarily on the largest financial institutions in the country. However, since criminals often follow the path of least resistance, the risk to community FIs is growing. A recent Office of the Comptroller of the Currency report found cyber crime to be one of the fastest-growing threats to FIs of all sizes.

Interestingly, an OCC report released just six months ago mentioned cyber security only once. Conversely, the more recent report devoted an entire section to cyber threats. Much of the increased focus on cyber security comes after a number of megabanks experienced distributed denial of service attacks a few months ago.

Although larger FIs wage daily battles against cyber threats, the report focuses on the potential migration of cyber threats to smaller community FIs.

The agency's concern is that the increase in frequency and sophistication of cyber threats might lead to an increase in the cost for resources designed to combat the problem.

This could lead smaller FIs to outsource services in an effort to reduce expenses. As the OCC points out, this outsourcing could inadvertently lead to increased operational risk, underscoring the importance of understanding your vendor partners' security policies and protections.

The report cites concerns that FIs might alter the way they apply technologies, for instance, adopting new and less market-tested applications, and reengineering business processes. These cost-saving measures need to be met with an increased understanding of the associated risks, and a comprehensive plan for ongoing oversight.

Also of concern is the increase in electronic bank fraud. The OCC points out that a number of FIs are failing to employ the resources necessary to effectively deal with the Bank Secrecy Act and anti-money laundering compliance.

According to the report, loan growth has achieved only half its average pace of the last 25 years. Unfortunately, this has led some FIs to offer new products with which they are not sufficiently familiar. It also has led a number of FIs to lower underwriting standards in an effort to compete for commercial loans.

With regard to community FIs, the report highlights strategic risk as being of particular concern. Small and midsize FIs need to beware of getting into specific business lines that require specialized risk management, such as leveraged loans, mortgage banking, indirect auto financing, and energy lending.

Smaller FIs are also cautioned about higher interest rate risk, as some FIs are buying additional mortgage-backed securities to invest their deposits in an effort to increase the duration of their investment portfolios.

For mid-size FIs, OCC supervision and policies will focuson seven areas. These include risk management of new or modified products and services; strategic and capital planning; underwriting of commercial and industrial loans; commercial real estate concentration; interest rate risk; compliance with consumer laws and anti-money laundering schemes; and operational and technology risks.

Increased awareness and access to appropriate resources are necessary to properly mitigate the risks associated with cyber threats. During this time of intense cyber security risks, make sure your FI is placing priority on due diligence and prudence.

Read more about security.