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Earthquake Risk Transfer for Financial services

Earthquake Risk Transfer for Financial Services

Sectors Overview

The Financial Services Sector is highly diverse. Each financial institution has unique security and resilience needs, resources, and plans depending on the functions it performs and its approach to risk management.
Effectively reducing the sector’s risk requires a shared understanding of the critical services the sector provides, the specific security and resilience risks it faces, and the collaboration mechanisms used among the sector’s security and resilience stakeholders.

Sector Profile

The Financial Services Sector includes thousands of depository institutions, providers of investment products, insurance companies, other credit and financing organizations, and the providers of the critical financial utilities and services that support these functions. Financial institutions vary widely in size and presence, ranging from some of the world’s largest global companies with thousands of employees and many billions of dollars in assets, to community banks and credit unions with a small number of employees serving individual communities.

Financial institutions are organized and regulated based on the services the institutions provide. Therefore, the profile of the sector is best described by defining the services offered. These categories include:

  • Deposit consumer credit, and payment systems products
  • Credit and liquidity products
  • Investment products
  • Risk transfer products

Deposit, Consumer Credit, and Payment Systems Products

Depository institutions of all types are the primary providers of wholesale and retail payments services, such as wire transfers, checking accounts, and credit and debit cards. Depository institutions and their technology service providers facilitate the conduct of transactions across the payments infrastructure, including electronic large value transfer systems, automated clearinghouses (ACH), and automated teller machines (ATM). These institutions are the primary point of contact with the sector for many individual customers. In addition, depository institutions provide customers with various forms of extensions of credit, such as mortgages and home equity loans, collateralized and uncollateralized loans, and lines of credit, including credit cards. Consumers have multiple ways of accessing these services. For example, customers can make deposits in person at a depository institution’s branch office, over the Internet, at an ATM, through the mail, via direct deposit using ACH transactions, via remote deposit capture, or on mobile devices.

Credit and Liquidity Products

Customers seek liquidity and credit for a wide variety of needs. For example, individuals may seek a mortgage to purchase a home, businesses may obtain a line of credit to expand their operations, and governments may issue sovereign debt obligations to fund operations or manage monetary and economic policy. Many financial institutions, such as depository institutions, finance and lending firms, securities firms, and government sponsored enterprises (GSEs) meet customers’ long- and short-term needs through a variety of financial products. Some of these entities provide credit directly to the end customer, while others do so indirectly by providing liquidity to those financial services firms that provide these services on a retail basis.
Essential to the credit and liquidity markets is the assurance that these products are available with integrity, fairness, and efficiency. The law provides consumer protections, including against fraud involving these products. Furthermore, credit and liquidity products are governed by a complex body of laws. These laws include Federal and State securities laws, banking laws, and laws that are tailored to the specifics of a particular class of lending activity.

Investment Products

Diversity of investment service providers and products promotes the global competitiveness financial markets. These products provide opportunities for both short- and long-term investments and include debt securities (such as bonds and bond mutual funds), equities (such as stocks or stock mutual funds), exchange-traded funds, and derivatives (such as options and futures). Securities firms, depository institutions, pension funds, and GSEs all offer financial products that are used for investing needs. These investment products are issued and traded in various organized markets, from physical trading floors to electronic markets.

Risk Transfer Products (Including Insurance)

The transfer of financial risks, such as the financial loss due to theft or the destruction of physical or electronic property resulting from a fire, cybersecurity incident, or other loss event, or the loss of income due to a death or disability in a family, is an important tool for the sustainability of businesses and economic vitality of individuals and their families. A wide variety of financial institutions provide risk transfer products to meet this market need.
The global market for financial risk transfer products is in the trillions of dollars. These products range from being noncomplex to highly complex. For example, insurance companies, futures firms, and forward market participants offer financial products that allow customers to transfer various types of financial risks under a myriad of circumstances. Market participants often engage in both financial investments as well as in financial risk transfers that enable risk hedging. Financial derivatives, including futures and security derivatives, can provide both of these functions for market participants.

Sector Risk

The sector faces ongoing risks associated with natural disasters, as well as the potential for physical attacks. Hurricanes, tornadoes, floods, and terrorist attacks all have the potential to cause physical disruptions that have significant impacts on Financial Services Sector operations.

Collectively, these organizations form the backbone of the Nation’s financial system and are a vital component of the global economy. These organizations are tied together through a network of electronic systems with innumerable entry points. An incident, whether manmade or natural, impacting these systems could have detrimental impacts throughout the economy.

In addition, the sector faces ongoing risks associated with natural disasters, as well as the potential for physical attacks. Earthquakes, hurricanes, tornadoes, floods, and terrorist attacks all have the potential to cause physical disruptions that have significant impacts on Financial Services Sector operations. For example, on October 29, 2012, the landfall of Superstorm Sandy caused a two-day closure of major equities exchanges, while fixed income markets were closed for one day.

To reduce the risk associated with incidents like these, the Financial Services Sector continuously assesses its risk posture by understanding its vulnerabilities and the current threat landscape and adjusting its approach to security and resilience based on these assessments. Risk assessments are a long-standing and accepted practice within the Financial Services Sector and are widely conducted by individual institutions and expected by regulators.

To aid in assessing the risk to the sector overall, based on our expertise in natural disaster, regularly coordinate with financial institutions to share information about current and emerging threats, develop mitigation strategies, and determine whether any existing or new assets or processes may be critical to the operations of the sector and, thus, require special attention. This coordination occurs primarily through the exchange of incident data, through the collaborative development of threat and mitigation information products, and regularly scheduled and event-driven messaging/ meetings.