Risks related to cybersecurity and illicit financial activity are among the top hazards facing banks in 2022, the federal bank deposit insurance agency said in report Friday.
In its 2022 Risk Review, the Federal Deposit Insurance Corp. (FDIC) said operational risks related to cybersecurity and illicit financial activity remain elevated, at large, for the banking industry.
“The number of ransomware attacks in the banking industry increased in 2021, and banks continued to discover vulnerabilities to their software and computer networks,” the report states. “The number and sophistication of cyber attacks also increased with remote work and greater use of digital banking tools. Moreover, threats from illicit activities continue to pose risk management challenges to banks.”
More specifically, the report asserts that geopolitical events (including those related to the war in Ukraine, such as Russian state-sponsored cyber threats) increase the likelihood of cyber attacks on banks.
The Risk Review, the FDIC said, provides a retrospective summary of conditions in the U.S. economy, financial markets, and banking sector, and presents key credit and market risks to banks as of year-end 2021. The report focuses on the effects of these risks on community banks in particular, as the FDIC is the primary federal regulator for the majority of community banks in the U.S. banking system.
Other risks cited by the report include: “zero-day vulnerabilities” in software (those in computer-software for which there is not yet an available patch to cure the vulnerability) that continue to be discovered and present significant risk until they are resolved; malicious cyber threat actors who pose serious risk to bank information systems by compromising security of software and computing services provided by third-party suppliers; and criminals continuing to develop innovative techniques to launder funds from illicit activities. All demand, the agency said, that financial institutions remain vigilant.
Key risks beyond the operational, the FDIC report stated, include:
- Agricultural credit: In which rising production costs and supply chain problems that affect the agriculture sector may pose challenges to the banking sector in 2022.
- Consumer debt: Despite general improvements in 2021, consumer loans remain sensitive to pandemic developments and could be a source of risk for the banking industry.
- Housing credit: While housing market conditions were favorable in 2021 and supported mortgage asset quality, “headwinds including increased mortgage rates from near-record lows may challenge the sector’s momentum,” the report stated.
- Leveraged lending, corporate debt: Banks remain vulnerable to potential distress in the corporate debt markets, particularly if interest rates rise and challenge the financial conditions of highly leveraged corporations. While community banks generally have limited direct exposure to the corporate debt market, the banking industry remains vulnerable to adverse corporate debt market developments.
- Interest rate risk and net interest margins: While higher interest rates could benefit banking industry interest income, they could be a source of risk for banks with substantial exposure to longer-term assets, the agency asserted.