At the G7 Conference in Paris, Mr. Ignazio Visco, the Governor of the Bank of Italy, discussed the ongoing evolution of cyber risk in the financial sector and the ways to address this risk. Mr. Visco highlighted that in cyberspace externalities are not contained within national borders and that the increasing reliance on third-party suppliers who fall outside the jurisdiction of financial authorities is one important source of cyber risk for supervised entities. He outlined cross-industry and cross-border cooperation, issuance of common security standards for hardware and software, and the use of artificial intelligence by supervisory authorities as the means to deal with the increasing cyber-security issues.
In the past, attackers have leveraged vulnerabilities in the IT systems of third parties to strike financial institutions. In the G7 Fundamental Elements For Third Party Cyber Risk Management in the Financial Sector, which was published last year, tenets on the appropriate management of third-party risk were introduced. Work on implementation of these tenets must now be accelerated, said Mr. Visco. When it comes to third parties that operate in regulated sectors, such as energy and telecoms, the different authorities must step up their coordination and cooperation efforts. Within each country there needs to be a cohesive national system of cyber defense that allows different authorities to work together effectively. In this context, governments have a natural role as coordinators.
The financial sector remains a prime target and such risks cannot be effectively mitigated by simply mandating supervised entities to follow good practices. Complex attacks can be deployed via obscure tools. Even large financial institutions with excellent (and expensive) defense systems can be lost in the face of cutting-edge threats; they can, of course, work out some of the technical details, but they might miss some of the broader, systemic elements, simply because they ignore relevant information such as precedents that affected other sectors, attacker tactics, and effective defenses adopted elsewhere. This kind of information is generally available only to intelligence agencies and the military. Cross-sector, nationwide as well as international cooperation is, therefore, essential. There needs to be a mechanism in each country that allows appropriate public bodies to coordinate and jointly support, each within its own mandate, the victims of a cyber campaign. In EU, the Network and Information Security (NIS) Directive takes this course.
Next, he added that cooperation must extend beyond borders, given the nature of many of the attacks and the interconnectedness of the financial system. This will always be a challenge because disclosing vulnerabilities to entities from another jurisdiction might endanger national security. Nonetheless, feasible solutions need to be found for this problem, since this kind of information-sharing might prove crucial for responding to some attacks. He said that the G7 remains the most favorable context for international cooperation—the many achievements of the G7 Cyber Expert Group (CEG) provide a good example of what can be done. The CEG was established in 2015 under the German presidency and it went on to deliver results during the presidencies of four other countries—Japan, Italy, Canada, and France. "We need to persevere on this route," said Mr. Visco.
According to Mr. Visco, one area that is ripe for more cooperation is the establishment of common security standards for hardware and software, which also covers the growing market for financial technology apps. In EU, a new regulation (which is currently under approval) will introduce a mechanism of cybersecurity certification for many products. This is an important step, but it would be more effective if G7 countries could converge at least on a subset of requirements. "If a service is not safe according to our own laws, it should not be on the market—and there should be a reasonable degree of convergence between laws in like-minded jurisdictions." Finally, he highlighted that artificial intelligence introduces new possibilities in cyber-security. It facilitates the detection and the exploitation of vulnerabilities, which the attackers know; therefore, the attackers are starting to deploy machine learning to analyze and penetrate target systems. Cyber-security companies use the same artificial intelligence analytic tools, with the goal of fixing the weak spots. By the same token, authorities could employ artificial intelligence to ascertain whether supervised entities are meeting mandated security standards on a continuous basis, added Mr. Visco.
Related Link: Speech
Keywords: Europe, EU, Italy, Banking, Cyber Risk, Cyber Security, Artificial Intelligence, Suptech, G7, Cross Border Cooperation, Systemic Risk, Operational Risk, Bank of Italy, BIS
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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