Fed’s Lockhart Warns of Instability

NEW YORK—A rising wave of cyberattacks on banks and underfunded pensions represent potential threats to financial stability, a key Federal Reserve official said Tuesday.

The central banker, Federal Reserve Bank of Atlanta President Dennis Lockhart, didn’t address monetary policy or the economic outlook in remarks prepared for delivery in Berlin before a conference held by the Levy Economics Institute. Instead, he talked about issues confronting regulators at a time where the promotion of financial stability is seen a critical task.

Mr. Lockhart observed “at a global level, the span of vigilance needs to be extremely broad,” and that’s because “the events of 2007 and 2008 brought many surprises.” In his speech, he zeroed in on threats to the payment system, most notably the sharp rise in electronic attacks directed at banks.

“Just in the last few months, the United States has experienced an escalating incidence of distributed denial of service attacks aimed at our largest banks,” Mr. Lockhart said, noting “the attacks came simultaneously or in rapid succession,” apparently at the hand of those who appeared to be “sophisticated” and “well organized.”

Mr. Lockhart said the motives for the attacks are “not always clear.” He explained “the intent appears to be to disable essential systems of financial institutions and cause them financial loss and reputational damage.”

The spate of attacks suggests that financial sector participants will need to view the situation as “a persistent threat with potential systemic implications.” And while such attacks are unlikely to bring the financial system down, they nevertheless need to be countered, he said.

Mr. Lockhart also warned about underfunded nature of much of the public pension system. “At a systemic level, this area of concern is more likely to be manifested as a gradually accreting threat to growth than a single event shock,” the official warned.

The central banker pointed at the large gaps between what has been promised and the money put into the funds. He said managers of these funds are often operating with unrealistic investment return goals that lead to an understating of the degree of the problem.

“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,” Mr. Lockhart said.