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Mr. Ashraf Khan and Majid Malaika

Based on technical assistance to central banks by the IMF’s Monetary and Capital Markets Department and Information Technology Department, this paper examines fintech and the related area of cybersecurity from the perspective of central bank risk management. The paper draws on findings from the IMF Article IV Database, selected FSAP and country cases, and gives examples of central bank risks related to fintech and cybersecurity. The paper highlights that fintech- and cybersecurity-related risks for central banks should be addressed by operationalizing sound internal risk management by establishing and strengthening an integrated risk management approach throughout the organization, including a dedicated risk management unit, ongoing sensitizing and training of Board members and staff, clear reporting lines, assessing cyber resilience and security posture, and tying risk management into strategic planning.. Given the fast-evolving nature of such risks, central banks could make use of timely and regular inputs from external experts.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Chapter 2 assesses vulnerabilities and potential risks to financial stability in private credit, a rapidly growing asset class—traditionally focused on providing loans to mid-sized firms outside the realms of either commercial banks or public debt markets—that now rivals other major credit markets in size. The chapter identifies important vulnerabilities arising from relatively fragile borrowers, a growing share of semi-liquid investment vehicles, multiple layers of leverage, stale and potentially subjective valuations, and unclear connections between participants. If private credit remains opaque and continues to grow exponentially under limited prudential oversight, these vulnerabilities could become systemic. Given the potential risks posed by this fast-growing and interconnected asset class, authorities could consider a more proactive supervisory and regulatory approach to private credit. It is key to close data gaps and enhance reporting requirements to comprehensively assess risks. Authorities should closely monitor and address liquidity and conduct risks in funds—especially retail—that may be faced with higher redemption risks. Against a backdrop of growing digitalization, evolving technologies, and rising geopolitical tensions, cyber risks are on the rise. Chapter 3 shows that while cyber incidents have thus far not been systemic, the risk of extreme losses from such incidents has increased. The financial sector is highly exposed, and a severe cyber incident could pose macro-financial stability risks through a loss of confidence, disruption of critical services, and spillovers to other institutions through technological and financial linkages. While better cyber legislation and cyber-related governance arrangements at firms can help mitigate these risks, cyber policy frameworks remain generally inadequate, especially in emerging market and developing economies. Thus, the cyber resilience of the financial sector needs to be strengthened by developing adequate national cybersecurity strategies, appropriate regulatory and supervisory frameworks, a capable cybersecurity workforce, and domestic and international information-sharing arrangements. To allow for more effective monitoring of cyber risks, reporting of cyber incidents should be strengthened. Supervisors should hold board members responsible for managing the cybersecurity of financial firms and promoting a conducive risk culture, cyber hygiene, and cyber training and awareness. To limit potential disruptions, financial firms should develop and test response and recovery procedures. National authorities should develop effective response protocols and crisis management frameworks.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Chapter 2 assesses vulnerabilities and potential risks to financial stability in private credit, a rapidly growing asset class—traditionally focused on providing loans to mid-sized firms outside the realms of either commercial banks or public debt markets—that now rivals other major credit markets in size. The chapter identifies important vulnerabilities arising from relatively fragile borrowers, a growing share of semi-liquid investment vehicles, multiple layers of leverage, stale and potentially subjective valuations, and unclear connections between participants. If private credit remains opaque and continues to grow exponentially under limited prudential oversight, these vulnerabilities could become systemic. Given the potential risks posed by this fast-growing and interconnected asset class, authorities could consider a more proactive supervisory and regulatory approach to private credit. It is key to close data gaps and enhance reporting requirements to comprehensively assess risks. Authorities should closely monitor and address liquidity and conduct risks in funds—especially retail—that may be faced with higher redemption risks. Against a backdrop of growing digitalization, evolving technologies, and rising geopolitical tensions, cyber risks are on the rise. Chapter 3 shows that while cyber incidents have thus far not been systemic, the risk of extreme losses from such incidents has increased. The financial sector is highly exposed, and a severe cyber incident could pose macro-financial stability risks through a loss of confidence, disruption of critical services, and spillovers to other institutions through technological and financial linkages. While better cyber legislation and cyber-related governance arrangements at firms can help mitigate these risks, cyber policy frameworks remain generally inadequate, especially in emerging market and developing economies. Thus, the cyber resilience of the financial sector needs to be strengthened by developing adequate national cybersecurity strategies, appropriate regulatory and supervisory frameworks, a capable cybersecurity workforce, and domestic and international information-sharing arrangements. To allow for more effective monitoring of cyber risks, reporting of cyber incidents should be strengthened. Supervisors should hold board members responsible for managing the cybersecurity of financial firms and promoting a conducive risk culture, cyber hygiene, and cyber training and awareness. To limit potential disruptions, financial firms should develop and test response and recovery procedures. National authorities should develop effective response protocols and crisis management frameworks.

International Monetary Fund. Western Hemisphere Dept.

In recent years, the Chilean financial sector experienced a series of cyberattacks, and this growing global risk of cybersecurity is posing a threat to the sector. Banks and financial market infrastructures appear to be resilient against cybersecurity risks, supported by a comprehensive regulatory framework, but lack of substitutability and high concentration of these institutions could pose systemic risk to the financial system. Moreover, given the current business segment of the Chilean fintech sector, expansion of the sector would lead to larger exposures to cybersecurity risk which the ongoing regulation of the sector by the authorities aims to mitigate. Ensuring sufficient human resources to ensure effective cybersecurity supervision of the financial sector as well as implementing ongoing policy initiatives, are warranted.

Tamas Gaidosch, Frank Adelmann, Anastasiia Morozova, and Christopher Wilson
This paper highlights the emerging supervisory practices that contribute to effective cybersecurity risk supervision, with an emphasis on how these practices can be adopted by those agencies that are at an early stage of developing a supervisory approach to strengthen cyber resilience. Financial sector supervisory authorities the world over are working to establish and implement a framework for cyber risk supervision. Cyber risk often stems from malicious intent, and a successful cyber attack—unlike most other sources of risk—can shut down a supervised firm immediately and lead to systemwide disruptions and failures. The probability of attack has increased as financial systems have become more reliant on information and communication technologies and as threats have continued to evolve.
International Monetary Fund. Monetary and Capital Markets Department

Abstract

Financial market sentiment has been buoyant since the October 2023 Global Financial Stability Report on expectations that global disinflation is entering its “last mile” and monetary policy will be easing. Interest rates are down worldwide, on balance, stocks are up about 20 percent globally, and corporate and sovereign borrowing spreads have narrowed notably. As a result, global financial conditions have eased (Figure ES.1).