"Financial Authorities Must Overhaul Response Frameworks to Counter Cyber Threats"... What Does the IMF Recommend?

[Gaps in Financial Security] (8)
IMF Flags Cyber Threats as a Key Risk in GFSR Released on October 13
Authorities Should Map and Visualize Key Infrastructure and Contagion Channels Across Entities
System-Wide Resilience Testing Needed...Including Oversight of Outsourced Infrastructure

Fallout from AI Asset Price Corrections, Renewed Inflation and Fiscal Concerns Also Key Risks
IMF Deputy Director: "Countries with Windfall Tax Revenues Should Prepare for a Downturn"
Beware Monetary Tightening Plus Fiscal Easing... "The Right and Left Hands Moving in Opposite Directions"

The International Monetary Fund (IMF) has warned that financial authorities around the world need to overhaul their response frameworks to keep pace with rapidly evolving cyber threats to the financial system. The IMF said authorities should map key infrastructure and contagion channels among different entities to gain a clear overview, then use that information to test the resilience of the system as a whole. It also stressed that authorities in some Asian countries facing a shortage of cybersecurity experts should make active use of artificial intelligence (AI), both a major cyber threat and a means of defense.

"Authorities should start with 'cyber mapping'...covering energy and tech companies, not just banks"

The IMF made these points in its Global Financial Stability Report (GFSR), released on October 13. Cyber mapping by authorities to address cyber threats to the financial system involves clearly visualizing and mapping key infrastructure, contagion channels and operational concentration among different entities in the financial sector. The IMF said this should cover not only financial institutions but also energy suppliers and tech companies that provide infrastructure. The report said authorities should use the identified key infrastructure to test the resilience of the system as a whole. It also said it was important to oversee risks associated with outsourced infrastructure, particularly because many financial institutions outsource operations to third parties, such as cloud service providers.

For some Asian countries struggling with a shortage of cybersecurity experts, the IMF said AI could help make up for the lack of expertise by strengthening monitoring, threat detection and automated responses. However, it also noted that AI is a major tool for cyber threats, meaning it should be used with caution.

The IMF said policy priorities should be set according to each country's level of cyber maturity. Advanced economies broadly need to identify critical business services, set tolerances for disruption, map operational dependencies and conduct regular resilience tests. Emerging market and developing economies, it said, should prioritize basic cyber hygiene, incident reporting systems, coordination on crisis response and supervisory capacity before adopting advanced AI-related supervisory frameworks. Low-income countries should focus on putting essential controls in place for scarce resources and protecting critical infrastructure.

The IMF warned, "As finance becomes more digitalized and interconnected, major cyberattacks affecting payments and transactions can cause significant losses and undermine market confidence." If a cyberattack disrupts the operations of critical nodes such as major banks, financial market infrastructure, cloud service providers and software vendors, it can immediately trigger a widespread shock to confidence, transmit stress and disrupt the provision of credit and financial services.

The report noted that these risks do not immediately threaten financial stability, but can develop into systemic risks that disrupt key financial intermediation functions and the supply of credit, causing serious economic fallout, if they are amplified by existing financial vulnerabilities. Before the report's release, Athanasios Vamvakidis, deputy director of the IMF's Monetary and Capital Markets Department, told Korean journalists, "We cannot wait for a crisis to erupt before responding. Authorities need to be proactive, and technology itself needs to be a key part of supervision and expertise."

Athanasios Vamvakidis, deputy director of the IMF’s Monetary and Capital Markets Department, answers questions during an interview with domestic media after an event unveiling the tokenization chapter of the Global Financial Stability Report (GFSR) at the Bank of Korea in Jung-gu, Seoul, on the 8th. Bank of Korea

"Monetary tightening plus fiscal easing? It's like the right and left hands moving in opposite directions"

The report identified three key risks that could trigger a sharp tightening in financial conditions and market turmoil in the short term: cyber threats, adjustments in the prices of AI-related assets and their fallout, and a resurgence of inflation and fiscal concerns.

So far, leading companies in the AI ecosystem have remained profitable, easing concerns about the valuations of AI-related stocks. But if investment in and profitability of the AI sector weaken or prove unsustainable, leverage, concentrated risk exposures and circular financing structures could amplify corrections in the prices of AI-related assets. In that case, countries with financial markets sensitive to global AI industry trends, or with substantial holdings of AI assets, could experience negative wealth effects or sharp market corrections. The report warned that a resurgence of inflation or fiscal concerns could trigger a sharp rise in government bond yields and widespread market turmoil.

The IMF stressed that countries such as South Korea, where tax revenues have risen sharply on the back of factors such as the semiconductor boom, should prepare for a downturn rather than increase spending while the economy is strong. Deputy Director Vamvakidis "said, "We are well aware that South Korea's stock market has performed well in recent years and that the country is at the forefront of AI development, the most powerful driver of the global economy. It is very positive that this has generated significant fiscal benefits and tax revenues."

He stressed, however, that policymakers should be mindful of the need to manage fiscal policy appropriately in these circumstances. They should not increase spending when the economy is strong. Deputy Director Vamvakidis said, "Save when times are good and spend when they are bad. If monetary policy is tightening while fiscal policy is easing, it's like the right and left hands moving in opposite directions."

He reiterated that countries such as South Korea that have received a 'windfall tax' should take a long-term view. Deputy Director Vamvakidis said, "Indiscriminate spending can create other imbalances. Countries should look at saving some of this windfall income in advance to prepare for uncertainty in the future of the AI sector or a deterioration in conditions," he said. "Even if tax revenues continue, countries should plan for the future rather than spend them all immediately."

This content was produced with the assistance of AI translation services.