Fed’s Lockhart Sees Risk from Cybercrime at Banks

Bloomberg Businessweek, November 27, 2012. ©2012 Bloomberg L.P. All Rights Reserved.

Federal Reserve Bank of Atlanta President Dennis Lockhart said financial regulators need to be vigilant in identifying risks, including cybercrime at banks and the underfunding of public pensions.

“At a global level, the span of vigilance needs to be extremely broad,” Lockhart said today in remarks prepared for a speech in Berlin. “The events of 2007 and 2008 brought many surprises,” he said. “Markets that some thought too small to cause much trouble ultimately posed systemic-scale problems.”

U.S. regulators are grappling with how to identify threats to financial stability more than four years after the collapse of Lehman Brothers Holdings Inc. The Dodd-Frank Act tightening post-crisis supervision created a council of regulators to monitor sources of instability.

Lockhart didn’t comment on the U.S. economic outlook or monetary policy in his prepared remarks.

One concern is “the potential for malicious disruptions to the payments system in the form of broadly targeted cyber-attacks,” Lockhart said at the Levy Economics Institute’s Hyman P. Minsky Conference on Financial Stability.

“Banks and other participants in the payments system will need to reevaluate defense strategies” in light of increasing attacks by “sophisticated, well-organized hacking groups,” he said.

Funding Shortfalls

U.S. states and municipalities face pension funding shortfalls of as much as $3 trillion or $4 trillion, when conservative investment returns are assumed, Lockhart said. While pensions may not trigger a financial crisis, the health of state and local governments contributes to economic stability, he said.

“The situation needs to be monitored,” Lockhart said. “The public pension funding problem, as it grows, has the potential to sap the resilience we wish for to withstand a future spell of financial instability.”

Lockhart, a former Georgetown University professor, has led the Atlanta Fed since 2007. The Atlanta Fed district includes Alabama, Florida, Georgia, and portions of Louisiana, Mississippi, and Tennessee.