Proposed Cyber Security Standards Require Banks to Beef Up Security

November 11, 2016
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What Could These Proposed Cyber Security Standards Mean For Your Business?

New York-based financial companies will not be the only ones required to strengthen their cybersecurity practices. Federal regulators recently unveiled proposed rules that would apply to all large banks.proposed cyber security standards Specifically, the Federal Reserve Board (FRB), the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC) proposed cyber security standards that would apply to all U.S. bank holding companies with total consolidated assets of $50 billion or more. They would also cover the U.S. operations of foreign banking organizations with total U.S. assets of $50 billion or more and all U.S. savings and loan holding companies with total consolidated assets of $50 billion or more. The regulators are also considering expanding the requirements to certain subsidiaries of these entities, as well as to third-party service providers.

Cyber Threats Could Cripple Financial Industry

The federal government fears that a large-scale cyberattack on one entity could cripple the whole financial system. Accordingly, the enhanced cybersecurity standards are designed to “increase the operational resilience of these entities and reduce the impact on the financial system in case of a cyber event experienced by one of these entities.” As the financial regulators explained in the proposed rule:

As technology dependence in the financial sector continues to grow, so do opportunities for high-impact technology failures and cyber-attacks. Due to the interconnectedness of the U.S. financial system, a cyber incident or failure at one interconnected entity may not only impact the safety and soundness of the entity, but also other financial entities with potentially systemic consequences.

Rule Requires Enhanced Cyber Standards

The proposed rule addresses five categories of cyber standards:

  • cyber risk governance;
  • cyber risk management;
  • internal dependency management;
  • external dependency management; and
  • incident response, cyber resilience, and situational awareness.

While many of the proposed requirements are in line with prior guidance, they would be mandatory and enforceable rather than just advisory.

Factors to Consider

In the category of cyber risk governance, senior leaders with responsibility for cyber risk oversight must be independent of business line management. Under the proposed rule, these senior leaders would need to have “direct, independent access to the board of directors” and would independently inform the board of directors on an ongoing basis of the firm’s cyber risk exposure and risk management practices.

With regard to cyber resilience, covered entities would be required to be capable of operating core business functions in the face of cyberattacks. The agencies are also considering requiring covered entities to establish protocols for secure, immutable, off-line storage of critical records. Such records would need to be stored in such a format that they could be restored by another financial institution, service provider, or the FDIC.

Also of note, the regulators are considering implementing the enhanced cybersecurity standards in a tiered manner. The enhanced standards would apply to all systems of covered entities, while an additional, higher set of expectations would govern those systems of covered entities that are critical to the financial sector.

According to the banking regulators, they are issuing the proposed rule prior to drafting “a more detailed proposal for consideration.” Comments on the rule must be received by January 17, 2017.