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COULD A LARGE-SCALE CYBER ATTACK ON THE WORLD’S FINANCIAL INSTITUTIONS CRASH AN ECONOMY?

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COULD A LARGE-SCALE CYBER ATTACK ON THE WORLD'S FINANCIAL INSTITUTIONS CRASH AN ECONOMY?

As US government adds banks, Wall Street and telecom companies to its planned simulated cyber attack on critical infrastructure, Corvil’s CBDO David Murray, hypothesizes the methods and motives that could lead to an attack.

David Murray

David Murray

The National Infrastructure Advisory Council (NIAC) has announced plans to widen the scope of its annual exercise (undertaken with utility companies), to include other types of critical infrastructure and essential services deemed vulnerable to cyber attacks. November’s “GridEx IV Security Exercise” will now test the resilience of big banks, Wall Street, the telecommunication industry as well as the power grid.  This move, in a backdrop of sophisticated and exponentially growing cyber attacks, is both prudent and necessary.

Large-scale attacks on national critical infrastructure are not new.  In December 2016, nefarious actors demonstrated their capabilities on Ukraine’s power grid when they succeeded in shutting off critical energy systems supplying heat and light to millions of homes. This was widely acknowledged by experts as the first example of hackers shutting off critical energy systems.

The technology that controls national critical infrastructure such as oil and gas, power plants, traffic management, etc. (i.e., Supervisory Control And Data Acquisition networks and Industrial Control Systems) is different from the technology used in Financial systems.  Notwithstanding, for threat actors intent on causing maximum havoc, a successful attack on any of these systems would pay big dividends.  But what would happen should the world’s financial institutions become their target?

Most financial institutions have robust information security solutions and protocols in place; however, the implications to the financial system of a major breach are significant, as called out by ESMA, IOSCO, the SEC, and other regulators. These organizations all recognize that a cyber attack or breach on one or multiple financial institutions is a real and imminent threat, which can result in a loss of market confidence and disruption to the global financial system, potentially leading to instability within the global economy.

Financial markets are prime targets for security breaches for a number of reasons – pure theft or criminal activity, espionage, hacktivism and nation state attacks. If a malicious individual or organization wished to target today’s financial markets, their motives could be to make money, steal valuable information, and/or disrupt or create havoc in an individual organization, economic segment, or nation.

Personal data stored by banks can be extremely valuable beyond direct theft purposes, as it is also a means to develop very rich phishing and social engineering methods. This data includes not only personal information (including all info required to open and maintain accounts), but also credit card details, checking and savings account details, brokerage and retirement account information, loan and debt information, vendor and payments information, as well as integrated financial plan details.  Arguably, only the credit reporting agencies have more Personally Identifiable Information (PII) and we have just witnessed their vulnerability with the breach announced by Equifax.

One significant concern of banks and regulators is compromised brokerage accounts – both for theft reasons and the potential implications of some entity being able to initiate trade or transfer activity across numerous accounts. While individual investors don’t typically move the market, if someone were to aggregate activity across a number of hijacked brokerage accounts – especially of less-frequently traded securities – he/she might have an impact. While challenging to accomplish, this example does raise an interesting point – one need not necessarily steal data or money to create disruption or achieve one’s goal.   This scenario, however, is minor, in contrast to more systemic disruption.

Bad actors may seek to influence markets by controlling the flow of data to which algorithms respond.   Stock, bond, commodities, and derivatives markets are predominantly electronically-operated and traded by an intricate set of computer programs reacting often autonomously to flows of data. These algorithms buy and sell securities in less than a hundredth of a second across dozens of markets and thousands of participants. Because algorithmic trading occurs in “machine-time,” organizations often lack complete transparency into what is transpiring in their networks when it’s transpiring. Therefore, anomalies can be extremely hard or near impossible to spot. The cautionary tale of errant algorithms rendering a company insolvent in the course of a lunch hour is a good example.

Financial institutions have implemented and are required by some regulations to deploy a “circuit breaker” or an “overseer” algorithm that can halt activity when anomalous conditions beyond a certain acceptable limit are detected. Intended to be a safety net, this can shut down parts of the trading network, causing unintentional and unforeseen consequences to the market.  Anomalous activity, like flooding the market, may trigger multiple circuit breakers, causing disruption to markets. Using a similar mechanism, they could target a specific company and attempt to mimic a flash crash on that stock, which could then create an avalanche effect before anyone has a chance to react.

How many times have we witnessed “flash crashes” in which tens or hundreds of millions of dollars of value have evaporated due to simple “glitches?” It took years to unwind the cause of the 2010 flash crash, and it was more than five years before anyone was indicted on charges of manipulation. It took five federal agencies nine months to determine there was no single cause of volatility in the late-2014 Treasuries market flash volatility.  Regulators are challenged in aggregating data to reconstruct the events of the crash. The speed at which it occurred made it impossible to tell what happened first, and therefore difficult to establish cause and effect. Since then, volumes have only increased.

Creating a large scale attack on a nation’s economy may involve similar disruption or manipulation of markets. While certain protections exist in regulated markets, a cyber attack that manipulates or disrupts market data or market operations and the automated buying and selling of securities, thereby eroding investor confidence, can start a detrimental chain of events.  Market activity for one type of security is often influenced by what happens in other markets. For example, take the nearly $20 trillion dollar US treasuries market that finances the US government. It is not unusual for computer programs to buy and sell treasuries to manage risk.

A disruption or seizing of markets, starting with the actual selling and devaluation of securities (and erosion of consumer confidence) can lead individuals to make investment decisions driven by emotion (not to mention the automated reactions by algorithms). This also impacts direct buying and hiring tolerances of small and large businesses alike, which in turn impacts a company’s creditworthiness, borrowing capacities, and ability to expand, which may in turn impact employment levels, and so on. Aspects of such situations can play out in minutes and hours while others do in weeks or months. Regardless, creating ample disruption to shake investor confidence in markets as well as induce fear and distraction from consumers, means businesses and governments may be a fine objective of a nation-state bad actor.

A digital “run on the banks,” as seen in the 1930s, is not inconceivable as well. While people are unlikely to withdraw their money to stuff in mattresses, it may promote a reaction that has lasting impact or disruption to the global economy.

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UK might need negative rates if recovery disappoints – BoE’s Vlieghe

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UK might need negative rates if recovery disappoints - BoE's Vlieghe 1

By David Milliken and William Schomberg

LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.

Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.

Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.

Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.

“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.

“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.

Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.

Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.

Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.

Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.

Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”

“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.

By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”

Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.

“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.

($1 = 0.7146 pounds)

(Reporting by David Milliken; Editing by William Schomberg)

 

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UK economy shows signs of stabilisation after new lockdown hit

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UK economy shows signs of stabilisation after new lockdown hit 2

By William Schomberg and David Milliken

LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.

The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.

A separate survey of households showed consumers at their most confident since the pandemic began.

Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.

The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.

Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.

Official data for January underscored the impact of the latest lockdown on retailers.

Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.

“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.

The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.

BORROWING SURGE SLOWED IN JANUARY

There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.

Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.

That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.

The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.

Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.

“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.

Some economists expect higher taxes sooner rather than later.

“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.

Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.

The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.

IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”

However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.

Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”

($1 = 0.7160 pounds)

(Editing by Angus MacSwan and Timothy Heritage)

 

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Oil extends losses as Texas prepares to ramp up output

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Oil extends losses as Texas prepares to ramp up output 3

By Devika Krishna Kumar

NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.

Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.

This week, both benchmarks had climbed to the highest in more than a year.

“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.

Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.

Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.

Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.

“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.

Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]

The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.

“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.

(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)

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