Future Financial Crisis Causes

Introduction

Global Financial Market is the market of foreign exchange which includes the Eurocurrency & its money markets, Eurobond & the global equity market, Commodity market, International capital market. The main cause among all other is the cyber-attacks on the financial institutions worldwide is identified below. It is that period when the assets prices fall suddenly due to the market liquidity evaporation. This writing will primarily focus on the next upcoming cause of the financial crisis. Further the assignment includes the causes of that crisis, the effects of that crisis, and also the solutions which if adopted can be helpful in fighting with the upcoming future global financial crisis in the market.

A. Future Financial Crisis

The global economy year 2020 endured its most adverse and deepest recession in the past 74 years, as the pandemic virus Covid-19 that upended all the lives and livelihoods. Thus, the year 2021 has been approached with a mixture of hope and causes for something better and improved financial condition globally. As Bailey and Tomlinson (2017) suggested, there could be many causes that would trigger more adverse financial crisis in future but one of them which could be more significant risk is the future Cyber-attacks. The cybersecurity have gone long flown under the government radar over worldwide where hackers are ready to set to cost the countries globally around $6trillion by the year 2021 as estimated by dwarfing the economic impacts of the natural disasters. Lane and Milesi-Ferretti (2017) advised that the cyber risk can be the most adverse cause to affect the future global financial crisis. Beyond just ransomware attacks and data breaches, the state-wise and independent hackers are increasingly making their targets as the major financial institutions and critical infrastructures that make the world go round accordingly. The major financial firms and institutions such as the International Monetary Fund (IMF), the United Nations (UN) under Bretton Woods, the International Bank for Reconstruction and Development (IBRD) along with the International Development Association (IDA) are already suggesting that the edge of ‘cyber risk’ will going to be the largest threat towards the upcoming broader financial economy (sciencedirect.com, 2020).

The emerging markets are also walking on the fine thin line currently which was hardly slammed by the trickle-down effect which is continued in the trade war among the world’s two biggest economies – the China economy and the US economy. This has been as increasing cause which complicated the geopolitical atmosphere in the global financial market worldwide and somehow affected the other countries also. It has been said by the economists that in fact the next upcoming future financial crisis can not only come from the irresponsive lending or the collapse of the global relationships but also due to the most neglected enemies that are cyber hackers (Uthayakumar et al. 2020).

The impacts of cyber risk can be amount by the example of the Bangladesh Bank Heist which presented threat by the cyber criminals who looks to grab the advantages of the worldwide security flaws in the world’s most used financial systems. Posner (2018) stated that Cyber-attacks mainly cause the disruptions in the financial services capabilities, especially in the payment systems all around the world. As surveys revealed that the cyber-attacks alone have cost the nations world-wide around more than $1 trillion which is far more than the previous record registered of $300 billion of financial damages which caused due to the natural disasters (Park et al. 2017). As an upcoming future cause of global financial crisis, Cyber risks are on top of the list throwing other below in the list.

The cyber-attack risks can cause a drastic shake in the confidence of the global financial service systems which will ultimately cause the banks, businesses and the consumers to be confused, stymied and panicked which have a major adverse impact on the economic activities globally. According to Bernanke (2018) over the past few years the attacks on the financial critical infrastructures have increased which is likely to bring the foreseeable future. It can be said by the global market position teetering on the edge that the global economy is in a very delicate state and one more major that could be cyber-attack can turn as the catalyst that will send the global financial market in a new recession.

B. Impacts of Cyber-attacks on Global Financial Market

As an effect of a cyber-attack on any computer communications or processing network can cause huge economic damage nearly up to $50 billion to $120 billion which is a loss that ranks somewhere between the losses which occurred at the time of hurricanes Katrina and Sandy as per the recent estimate studies. According to Zhang and Broadstock (2018), the federal Bureau of Investigation have issued warnings to the banks all over the world about the possibility of a large scale cyber-attack which are termed as the ATM “cash-out” strike in which the waves of the synchronised fraudulent withdrawals can drain from the bank accounts. The adversaries of the cyber-attacks contributing to the financial crisis have three types of impacts as crises according to the US financial institutions as noted below-

The first one is the Slow burn crisis which occurs when the cyber capabilities are adversely used to cause any kind of long term friction or disruption and loss of confidence. This level of crisis may cause the whole nation to go under the response of the military. As featured by World Bank (2019), one of such cyber-attacks has an example of the Iran’s DDoS attacks upon the US and North Korea’s financial institutions which increased the on-going disruptions and heists. Although these type of actions thus have fallen far short in triggering a long term systematic crisis.

The next is the Exacerbated crisis which happens when the financial crisis is already present there progressing and the nation is teetering on the edge of an extremely adverse effect which was intentionally pushed by a cyber-attack (Uthayakumar et al. 2020). The DDoS attacks have disrupted the phone services and the email communications further inciting panics and bank runs. In the midst of a fast running financial market, the cyber induced attacks and crashes could result in tripping the global stocks or the bond markets and turn into a rout.

The Initiated crisis is just the opposite of the exacerbated crisis. The initiated crisis arises when cybercriminal uses he cyber abilities to create a scenario of financial downfall which otherwise have not have occurred (Park et al. 2017). The cybercriminal in order to inflict the most of the cyber damage to the economy attacks on the important and crucial financial institutions’ data infrastructure and tries to breach the security (springer.com, 2019). It could hit the financial system at the exact precise pace and time where the infrastructure is almost technologically and economically fragile in nature and can have harm. These attacks basically targets the funding markets, liquidity provisions, key collaterals, settlements and the transaction systems which are associated with the vendor support systems.

The cyber-attacks hit mainly the important systematically running financial institutions and utilities along with the crucial internet infrastructure systems. Posner (2018) stated that Cybercriminals can make these institutions as their targets because there has always been lack of substitutability in the system which creates the rich set of targets which have potential in it to the cybercriminals. Lane and Milesi-Ferretti (2018) suggested that the cyber-attacks which will going to be the future cause of financial instability and crisis have resulted impacting on the potential timed cyber-attacks which were designed to mainly exploit the dynamics which are primarily associated to the traditional financial contagion channels that have been insufficiently checked and examined before and needs more security. As the number of sophisticated cyber risks is on rise, at this time only the collaboration of the industry participants of both public and private institutions, of both internationally and domestically can ensure the resilience in the global financial system to protect them from upcoming crises.

C. Measures to mitigate the future cyber-attack risks

According to the latest researches done by the International Monetary Fund (IMF) reports, There can be adopted six major strategies which could considerably protect the financial market and strengthen the cybersecurity along with improving the global financial stability-

Cyber Mapping and Risk Quantification

With the help of the cyber mapping technique the global financial system’s interdependencies can be understood in a better way by the key mapping operations, critical infrastructure and the technological interconnections. The quantifying of the risks can be stated as the focusing of the responses of the potential impacts and promoting a far better and stronger commitment towards the issue (sciencedirect.com, 2020). This happens due to the shortcomings of the data which can impact the cyber events and challenges which needs to be accelerated to reflect the growing important of cyber security.

Converging Regulation

The international financial bodies like the Committee on payments and Market Infrastructure, the Financial Stability Board and the Basel Committee have taken steps to strengthen the coordination and to foster the convergence of cyber financial security. Along with this more internationally the consistent regulations and supervisions which will help in reducing the compliance cost and to build a better platform for making stronger cross-border cooperation is involved (Uthayakumar et al. 2020). The Global Financial Authorities looking after the global financial affairs needs to work more together to implement the new cyber security laws and regulations.

Capacity to respond

As the cyber-attacks have been a common increasing risk to the financial system worldwide, it has to be secured that the financial systems have the ability to resume the operations as quick as possible even in the phase when the attack is successful by safeguarding the stability of the financial market globally. The recovery strategies and the so-called responses are still holding as incipient, particularly I the low-income countries where there is a need to support in the development process of them (Park et al. 2017). Various international arrangements are required for supporting the responses and recovery among the cross-border institutions and the services among them.

Willingness to share

As the time is passing there should be willingness to share more information related to the attacks, threats, their responses and other details across the public and private sector industries which will ultimately enhance the capabilities to deter the risks and respond towards them effectively (springer.com, 2019). Yet there are some of the serious barriers remains constant which often stems from the national security concerns and the data protection regulations and laws. The central banks and financial supervisors need to develop their information sharing practices and protocols which will work effectively in the midst of the constraints.

Stronger Deterrence

The rising cyber-attacks should be made more expensive and riskier through various methods so that the crime proceedings and prosecution of cyber-criminals can be confiscated. It is necessary to step-up on the international efforts to create a preventive, disrupting and deterring the attackers who would ultimately reduce the threats from its sources. According to World Bank (2019), since the cyber attackers and hackers know no boundaries, the security against the global crimes requires advanced and updated global enforcements. To do this, it requires a strong cooperation between the national authorities and the law enforcement agencies to criticalise the infrastructural security across boundaries.

Capacity Development

The low income countries who are particularly vulnerable towards the cyber risks and attacks needs help developing and emerging the economies to build a better cybersecurity ability to strengthen the financial inclusion and support the financial stability. The recent Covid-19 2020 highlighted all the decisive roles that play as the connectivity in the developing nations.

All these measure if implemented then with any cyber-attack, the proliferation of all the cyber risks and threats to the global financial market can make the rest of the world a safe and secured place.

Conclusion

The assignment above presents the position of current and future financial crises scenarios where it has been revealed that one of the primary causes of the upcoming financial crisis can be the increasing cyber-attack risks. Beyond just ransomware attacks and data breaches, the state-wise and independent hackers are increasingly making their targets as the major financial institutions and critical infrastructures that make the world go round accordingly. This cause impacts the global finance market adversely with various affects such as it disrupts the systematically running financial institutions and utilities along with the crucial internet infrastructure systems. These can be mitigated if few of the measure can be adopted by the primary financial institutions. These measure if implemented then with any cyber-attack, the proliferation of all the cyber risks and threats to the global financial market.

References

Bailey, D. and Tomlinson, P.R., 2017. Back to the future? UK industrial policy after the great financial crisis. In Economic policies since the global financial crisis (pp. 221-263). Palgrave Macmillan, Cham.

Bernanke, B.S., 2018. The real effects of disrupted credit: Evidence from the Global Financial Crisis. Brookings Papers on Economic Activity, 2018(2), pp.251-342.

Lane, M.P.R. and Milesi-Ferretti, M.G.M., 2017. International financial integration in the aftermath of the global financial crisis. International Monetary Fund.

Lane, P.R. and Milesi-Ferretti, G.M., 2018. The external wealth of nations revisited: international financial integration in the aftermath of the global financial crisis. IMF Economic Review, 66(1), pp.189-222.

Park, C.Y., Lee, J. and Villafuerte, J., 2017. 20 Years After the Asian Financial Crisis: Lessons Learned and Future Challenges.

Posner, E.A., 2018. Last resort: the financial crisis and the future of bailouts. University of Chicago Press.

Uthayakumar, J., Metawa, N., Shankar, K. and Lakshmanaprabu, S.K., 2020. Financial crisis prediction model using ant colony optimization. International Journal of Information Management, 50, pp.538-556.

World Bank, 2019. Global Financial Development Report 2019/2020: Bank regulation and supervision a decade after the global financial crisis. The World Bank.

Zhang, D. and Broadstock, D.C., 2018. Global financial crisis and rising connectedness in the international commodity markets. International Review of Financial Analysis, p.101239.