Tips for Banks to Navigate Top Risks in 2022

Banks continue to meet unprecedented challenges of the Covid-19 pandemic, geopolitical cyberthreats and increasing public awareness of environment, social and governance (ESG) issues.

With the current landscape posing ever-evolving risks for banks, Moss Adams collaborated with Bank Director to conduct the 2022 Risk Survey and explore what areas are front of mind for bank industry leaders. Top insights from Bank Director’s 2022 Risk Survey include that the vast majority of survey respondents reported that cybersecurity and interest rate risks pose increasing concerns, and they expect these challenges to persist in the second half of the year, due to turbulent economic and geopolitical conditions. The survey also identified that banks increasingly focus on issues related to compliance and regulatory risks.

Cybersecurity Oversight
Concerns about cybersecurity topped the survey responses: 93% of respondents stated that a need for increased cybersecurity grew significantly or somewhat. Bank executives and board members submitted survey responses in January, prior to heightened federal government warnings of increased Russian cyberattacks. Banks’ concerns will likely continue to increase as a result.

Data Breach Rates and Precautions
While only 5% of respondents reported experiencing a data breach or ransomware attack at their own institution in the years 2020 and 2021, 65% reported data breaches at their bank’s vendors. In response, 60% stated they updated their institution’s third-party vendor management policies, processes, or risk oversight.

As a critical U.S. industry, banks follow stringent regulatory requirements for data security. The Federal Financial Institutions Examination Council (FFIEC) cybersecurity assessment tool provides a maturity model for banks to assess their cybersecurity maturity as baseline, evolving, intermediate, advanced or innovative. Ninety percent of respondents completed a cybersecurity assessment over the past 12 months; 61% used the FFIEC’s tool in combination with other methodologies, and another 19% only used the FFIEC’s tool. And 83% of respondents said that the maturity of their bank’s cybersecurity program increased in 2021, compared to previous assessments.

Room for Improvement
Banks noted several areas of improvement for their cybersecurity programs, including training for bank staff (83%), technology to better detect and deter cyberthreats and intrusions (64%) and internal controls (43%). Thirty-nine percent believe they need to better attract and retain quality cybersecurity personnel. Banks’ investments in cybersecurity programs remained flat compared to the 2021 survey, with a median budget of $200,000.

As cybersecurity risks increase, banks should focus on researching and making appropriate investments, as well as implementing comprehensive planning for staff training, technology and governance. At the board level, respondents noted several activities as part of that body’s oversight of the cybersecurity risk management program. Key among these is board-level training (79%), ensuring continual improvements by management of their cybersecurity programs (75%) and being aware of any deficiencies in the bank’s cybersecurity program (71%).

Interest Rate Risk Concerns
The prospect of rising interest rates fueled anxiety for our respondents: 71% noted increased concern. As the Federal Open Market Committee combats higher inflation by hiking interest rates, 74% reported hoping that they wouldn’t raise rates by more than one percentage point by the end of 2022 — which is currently below what’s projected.

Faced with likely rate hikes, banks are looking to their own business models to navigate a potential decrease in overall lending volume and potential pressure on profit margins. Respondents also noted that they were increased their focus in sectors such as commercial and industrial, commercial real estate and construction, or with the Small Business Administration or obtaining other small business loans.

ESG Initiatives
Banks are under increasing pressure to adopt ESG initiatives. More than half of respondents don’t yet focus on ESG issues in a comprehensive manner, and regulators have yet to impose ESG requirements for banks. However, more than half of survey respondents say they have set goals and objectives in a variety of ESG-related areas, primarily in the social and governance verticals — employee development and community needs in particular topped the list.

Only 6% said that investors or other company stakeholders currently look for more disclosure around ESG initiatives, with diversity, equity and inclusion topping the list at 88%. Banks that haven’t established ESG strategies could first identify their top priority areas. These priorities may vary for each organization and will need to consider the values of investors, customers and local community.

4 Key Risks Facing Banks

Cybersecurity continues to be the top risk identified in Bank Director’s 2022 Risk Survey, sponsored by Moss Adams. But other risk areas have also grown increasingly prominent for the bank executives and board members responding to the survey, particularly interest rate risk. In this video, Moss Adams Partner Craig Sanders shares areas where banks can strengthen their weaknesses on cybersecurity. He also addresses the impact of fintechs on bank strategies and the rising prominence of environmental, social and governance (ESG) matters.

Topics addressed include:

  • Cyber Preparedness
  • Proactive Vendor Risk Management
  • Strategic Risks to Consider
  • Rising Interest Rates
  • Focusing on ESG

The 2022 Risk Survey explores several important risk areas, including credit risk, cybersecurity and emerging issues such as ESG. The survey results are also explored in the 2nd quarter 2022 issue of Bank Director magazine.

Getting Proactive About Third-Party Cyber Risk

Bank Director’s 2022 Risk Survey, sponsored by Moss Adams, finds most bank executives and board members (65%) report that at least one vendor experienced a data breach or ransomware attack in 2020-21. While most weren’t directly affected by these incidents, 60% of respondents whose vendor experienced an attack took the opportunity to update third-party management policies, processes and/or risk oversight in response.

Cyberattacks on U.S. financial institutions are rarely impactful, according to the Financial Services Information Sharing and Analysis Center’s (FS-ISAC) “Navigating Cyber 2022” report. However, the cyber-focused industry consortium added that “several high-profile third-party incidents have impacted the security and availability of products and services used by many financial firms.” Banks have responded by devoting resources to assessing exposure, patching and mitigating, as well as increasing compliance mandates for third-party operational resilience.

Regulators are taking note of the threat. An interagency rule approved by the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. in November 2021 mandates that banks must notify their primary regulator of a cyber incident within 36 hours; this rule went into effect on April 1, 2022. Service providers must notify affected bank clients “as soon as possible” when they determine that a cyber incident has or will cause a “material service disruption or degradation” for four hours or more. From there, banks must assess whether the incident will have a material impact on the organization and its customers, and whether that will trigger a notification by the bank to its regulator.

In March 2022, the Securities and Exchange Commission proposed new rules around cybersecurity disclosure that would include how companies select and monitor third-party providers. And guidance is still pending from the primary financial regulators around risks related to third-party relationships. That guidance would include an assessment of the vendor’s information security program, including if the vendor has “sufficient experience in identifying, assessing, and mitigating known and emerging threats and vulnerabilities.”

Bank boards and leadership teams will need to be proactive — rather than reactive — as regulators get even more serious about this issue. “Know where you stand and what [vendors are] doing to address any of your concerns, and that starts with having a defined criteria of what you require,” says Cody Harrell, managing director at Strategic Resource Management (SRM), a Memphis, Tennessee-based consulting firm.

Broadly, bank executives and boards need to understand the risks inherent with all of the bank’s vendors, including existing ones, says Harrell. “Who are the most critical vendors to our business? Who are the ones that house sensitive data? Where’s our biggest risk? And not only from a liability standpoint, but from an operational standpoint.” If a vendor falls victim to a cyberattack, will the bank still be able to serve customers? “You need to have a vendor due diligence checklist for each vendor, regardless of whether there’s a problem or not,” he adds. “[Make] sure that everyone that’s within the ecosystem is in compliance with your requirements.”

All vendors also need to comply with regulatory guidelines. The November 2021 notification rule specifies that service providers must comply even if the contract states otherwise. But bank boards are ultimately responsible for ensuring compliance. “If the bank doesn’t have a program of regularly conducting annual vendor diligence and sending renewed questionnaires and identifying gaps, then you’re not conducting ongoing diligence,” says Steve Cosentino, a partner at the law firm Stinson LLP who regularly negotiates agreements between banks and their service providers.

Here are four considerations for bank boards seeking to enhance their third-party oversight.

Understand how vendors will respond to a cyber incident. This should be uncovered during due diligence.

When a breach occurs, “how much you did in the vendor diligence area [will impact] how quickly you’re able to respond to an incident,” says Cosentino. “If you have a quality vendor diligence program [with] extensive diligence and ongoing monitoring, those will all be helpful facts if you’re subject to a potential litigation claim or class action, which has been more and more common.”

In line with the regulatory rule around security notifications, banks need to know when they’ll be notified of an incident, and whether the vendor or the bank will communicate with affected customers. And even if individuals weren’t affected, that doesn’t absolve the vendor from notifying the bank, says Cosentino. “It’s evidence of a flaw in [the vendor’s] systems and security processes that next time could potentially affect the bank, and the bank needs to be apprised of what they’re doing to remedy that.” He adds that these obligations could differ in a security breach, where confidential data may have been accessed, versus a security incident, which may not involve the theft of personal information.

Banks should also know if the service provider will engage an outside cyber forensics firm to investigate a breach, and whether that company is on retainer and can respond quickly. “Taking a day or two out to review different forensic investigators and getting a contract in place and all that, that’s time that’s lost,” says Cosentino. Regulators will ask, “Why did it take so long between the time that the breach occurred and [when] the notices went out?”

The bank should also know what the vendor won’t do. “What are the things that my critical vendor, my third-party provider, is requiring me to take care of, that they’re not?” says Moss Adams Partner Craig Sanders. That could include password resets, network design or educating administrators.

Don’t overlook fourth parties. Vendors have their own vendors, from smaller fintechs that may provide ancillary services to big cloud platforms like Amazon Web Services or Microsoft Corp.’s Azure, and those can pose their own risks. Effective diligence on fourth parties can be difficult, says Cosentino, but banks can take a few steps. Questionnaires sent to third-party vendors should address their own due diligence with subcontractors, and banks should access SOC (System and Organization Controls) reports on those fourth parties. In addition, “Put in your agreement some language that says that the service provider may use subcontractors, [but] they always have to be responsible for [their vendors’] actions and omissions,” he says. “But they can only do so after completion of a third-party risk management vendor diligence review consistent with the FFIEC IT examination handbook and interagency guidance on third-party relationships.”

Don’t silo due diligence. The due diligence exercise shouldn’t be limited to the bank’s technology team.

“The IT group doesn’t always have an understanding of all of the software and systems that process personal information or nonpublic personal information. And that slips through the cracks a lot,” says Cosentino. He recommends a data mapping exercise that includes multiple areas so the bank knows where all of its information is housed. “Conduct that review with your IT group, obviously, but also with the marketing team, your sales team, your operations team, your legal team, because you will find when you do that, there are a number of engagements with third-party service providers where nonpublic personal information is involved, and they’re not picked up in the vendor diligence process,” says Cosentino. Involving multiple teams in the bank will ensure everyone’s on the same page before a breach occurs. “If you do have a data security incident, you have to know where all that information is stored, and how to address, analyze and review [where the] personal information is and what actions you need to take with respect to notifications and remediations and all that,” he says.

While multiple teams within the bank should be included along the way, centralizing vendor management — ensuring an individual has responsibility or using a vendor management platform, or both — can help banks stay on track. “A lot of the financial institutions that we see, various departments control a contract or a decision or a vendor evaluation, and they’re not necessarily speaking to the other departments and having a defined criteria that everyone should comply with,” says Harrell. Vendor diligence requires a lot of documentation, and that needs to be tracked. “Make this a systematic approach.”

Set the tone at the top. In a 2019 letter, the FDIC reminded financial institutions that “boards of directors and senior management are responsible for managing risks related to relationships with technology service providers. Effective contracts are an important risk management tool for overseeing technology service provider risks, including business continuity and incident response.”

Unfortunately, boards often lack the skill sets to understand cybersecurity, says Sanders. “They’ve got to have that knowledge and expertise at the governance level to really understand what should be going on.” He recommends that boards hear from the bank’s chief information security officer at least quarterly and should seek the best technology providers that meet the bank’s strategic needs — not selecting a solution because it’s the cheapest option. The bank may find it gets what it pays for.

“Be honest with yourself about where the risk is and what the involvement from the institution is that should take place at the governance level,” says Sanders. “From the top down, give the support to management and compliance to go out and do what they need to do.”

For more information on vendor risk management, you can view “Avoiding Gaps in Vendor Risk Management” and “Vendor Management: What the Board Needs to Know,” both part of Bank Director’s Online Training Series. For advice on tightening up your bank’s cybersecurity practices amid today’s geopolitical tensions, consider reading “From Russia With ‘Love.’” This issue is also addressed in “Ransomware Attacks Heat Up,” the cover story in the fourth quarter 2021 issue of Bank Director magazine.

Bank Director’s 2022 Risk Survey, sponsored by Moss Adams, surveyed 222 independent directors, chief executive officers, chief risk officers and other senior executives of U.S. banks below $100 billion in assets to gauge their concerns and explore several key risk areas, including credit risk, cybersecurity and emerging issues such as ESG. Bank Services members have exclusive access to the complete results of the survey, which was conducted in January 2022.

Bank Director Releases 2022 Risk Survey Results

BRENTWOOD, TENN., Mar. 29, 2022 – Bank Director, the leading information resource for directors and officers of financial institutions nationwide, today released its 2022 Risk Survey, sponsored by Moss Adams LLP. The findings reveal a high level of anxiety about interest rate risk as well as a lack of awareness in the environmental, social and governance (ESG) space.

The 2022 Risk Survey finds that the majority of responding directors, CEOs, chief risk officers and other senior bank executives are more concerned about interest rate risk compared to the previous year. Why? While interest rate increases — kicked off with a quarter-point hike announced by the Federal Reserve earlier this month — would ease pressures on bank net interest margins, they could also dampen loan demand and slow economic growth. When asked about the ideal scenario for their institution, almost three-quarters of survey respondents say they’d like to see a moderate rise in rates in 2022, by no more than one point. That’s significantly less than the 1.9% expected from the Fed by the end of the year.

“Finding the balance between an increase in rates without a decrease in the volume of lending can be an art form,” says Craig Sanders, partner at Moss Adams. “Banks with more diverse loan portfolios and those that made the right bets regarding loan terms will be better positioned to adapt to the new, ever-changing environment.”

Findings also reveal that more than half of the respondents’ banks don’t yet focus on ESG issues in a comprehensive manner, and just 6% describe their ESG program as mature enough to publish a disclosure of their progress. 

“While we see a handful of primarily larger, public banks focused on ESG, it’s a broad issue that touches on several areas important to community banking, including community and employee engagement, risk management and data privacy, and corporate governance,” says Emily McCormick, vice president of research at Bank Director. “The survey finds banks setting goals in these distinct spheres when it comes to ESG, despite a lack of formal programs or initiatives.”

Key Findings Also Include: 

Top Risks
Respondents also reveal increased anxiety about cybersecurity, with 93% saying that their concerns have increased somewhat or significantly over the past year. Along with interest rate risk, regulatory risk (72%) and compliance (65%) round out the top risks. One responding CRO expresses specific concern about “heightened regulatory expectations” around overdraft fees, fair lending and redlining, as well as rulemaking from the Consumer Financial Protection Bureau around the collection of small business lending data. 

Enhancing Cybersecurity Oversight
Most indicate that their bank conducted a cybersecurity assessment over the past year, with 61% using the Cybersecurity Assessment Tool offered by the Federal Financial Institutions Examination Council (FFIEC) in combination with other methodologies. While 83% report that their program is more mature compared to their previous assessment, there’s still room to improve, particularly in training bank staff (83%) and using technology to better detect and/or deter cyber threats and intrusions (64%). Respondents report a median budget of $200,000 for cybersecurity expenses in fiscal year 2022, matching last year’s survey.

Setting ESG Goals
While most banks lack a comprehensive ESG program, more than half say their bank set goals and objectives in several discrete areas: employee development (68%), community needs, investment and/or volunteerism (63%), risk management processes and risk governance (61%), employee engagement (59%), and data privacy and information security (56%).

Protecting Staff
More than 80% of respondents say at least some employees work remotely for at least a portion of their work week, an indicator of how business continuity plans have evolved: 44% identify formalizing remote work procedures and policies as a gap in their business continuity planning, down significantly compared to last year’s survey (77%). Further, banks continue to take a carrot approach to vaccinations and boosters, with most encouraging rather than requiring their use. Thirty-nine percent require, and 31% encourage, employees to disclose their vaccination status.

Climate Change Gaps
Sixteen percent say their board discusses climate change annually — a subtle increase compared to last year’s survey. While 60% indicate that their board and senior leadership team understand the physical risks to their bank as a result of more frequent severe weather events, less than half understand the transition risks tied to shifts in preferences or reduced demand for products and services as the economy adapts.

The survey includes the views of 222 directors, CEOs, chief risk officers and other senior executives of U.S. banks below $100 billion in assets. Full survey results are now available online at BankDirector.com.

About Bank Director
Bank Director reaches the leaders of the institutions that comprise America’s banking industry. Since 1991, Bank Director has provided board-level research, peer-insights and in-depth executive and board services. Built for banks, Bank Director extends into and beyond the boardroom by providing timely and relevant information through Bank Director magazine, board training services and the financial industry’s premier event, Acquire or Be Acquired. For more information, please visit BankDirector.com.

About Moss Adams LLP
With more than 3,800 professionals across 30-plus locations, Moss Adams provides the world’s most innovative companies with specialized accounting, tax, and consulting services to help them embrace emerging opportunity. We serve over 400 banks and other financial institutions in all stages of the growth cycle helping our clients navigate an evolving regulatory environment, maintain profitability, and manage risk throughout each phase of their business’s growth. Discover how Moss Adams is bringing more West to business. For more information visit www.mossadams.com/fs.

Source:
For more information, please contact Bank Director’s Director of Marketing, Deahna Welcher, at dwelcher@bankdirector.com.

2022 Risk Survey: Complete Results

What’s keeping board members, CEOs, risk officers and other key executives up at night? 

With a number of evolving risks facing the industry, bank leaders have a lot on their plate. They weigh in on these key risks — from cybersecurity to rising interest rates and more — in Bank Director’s 2022 Risk Survey, sponsored by Moss Adams LLP. While it’s not surprising to find respondents almost universally more worried about cybersecurity — a perennial point of anxiety in the survey — they also reveal increased concerns in a number of areas. 

Almost three-quarters say they’re more worried about regulatory risk, with one respondent citing specific concerns about overdraft fees, fair lending and redlining, and rulemaking from the Consumer Financial Protection Bureau.  

Given expected rate hikes from the Federal Reserve, 71% say they’re worried about interest rate risk. Three-quarters hope to see a moderate rise in rates by the end of the year, though uncertainty around inflationary pressures, exacerbated by the conflict in Ukraine, could yield surprises.  

Members of the Bank Services program now have exclusive access to the full results of the survey, including breakouts by asset category. Click here to view the report.

Findings also include:

  • Most bank executives and board members report that their cybersecurity programs have matured, but respondents still identify key gaps in their programs, particularly in training bank staff (83%) and using technology to better detect and/or deter cyber threats and intrusions (64%). Respondents also reveal how the board oversees this critical threat.
  • In an indicator of how business continuity plans have evolved through the pandemic, more than 80% say at least some employees work remotely for at least a portion of their work week. When it comes to vaccinations, banks continue to take a carrot approach to vaccinations, with most encouraging rather than requiring Covid-19 vaccinations and boosters. Thirty-nine percent require, and 31% encourage, employees to disclose their vaccination status.
  • Environmental, social and governance disclosures may be getting a lot of buzz, but more than half of the survey participants don’t yet focus on environmental, social and governance issues in a comprehensive manner, but the majority set goals in several discrete areas related to ESG.
  • Sixteen percent say their board discusses climate change annually — a subtle increase compared to last year’s survey. 

Bank Director’s 2022 Risk Survey, sponsored by Moss Adams, surveyed 222 independent directors, chief executive officers, chief risk officers and other senior executives of U.S. banks below $100 billion in assets to gauge their concerns and explore several key risk areas, including credit risk, cybersecurity and emerging issues such as ESG. The survey was conducted in January 2022.

2022 Risk Survey Results: Walking a Tightrope

Despite geopolitical turmoil following Russia’s invasion of Ukraine, the Federal Reserve opted to raise interest rates 25 basis points in March — its first increase in more than three years — in an attempt to fight off a high rate of inflation that saw consumer prices rising by 7.9% over the preceding year, according to the Bureau of Labor Statistics.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the central bank said in a statement. The Federal Open Market Committee (FOMC) is the policymaking body within the Fed that sets rates, and Fed Chairman Jerome Powell remarked further that the FOMC will continue to act to restore price stability.

“We are attentive to the risks of further upward pressure on inflation and inflation expectations,” Powell said, adding that the FOMC anticipates a median inflation rate of 4.3% for 2022. He believes a recession is unlikely, however. “The U.S. economy is very strong and well-positioned to handle tighter monetary policy.”

Six more rate hikes are expected in 2022, which overshoots the aspirations of the directors, CEOs, chief risk officers and other senior executives responding to Bank Director’s 2022 Risk Survey, conducted in January. Respondents reveal a high level of anxiety about interest rate risk, with 71% indicating increased concern. When asked about the ideal scenario for their institution, almost three-quarters say they’d like to see a moderate rise in rates in 2022, by no more than one point — significantly less than the 1.9% anticipated by the end of the year.

Moss Adams LLP sponsors Bank Director’s annual Risk Survey, which also focuses on cybersecurity, credit risk, business continuity and emerging issues, including banks’ progress on environmental, social and governance (ESG) programs. More than half of the respondents say their bank doesn’t yet focus on ESG issues in a comprehensive manner, and just 6% describe their ESG program as mature enough to publish a disclosure of their progress.

Developments in this area could be important to watch: The term ESG covers a number of key risks, including climate change, cybersecurity, regulatory compliance with laws such as the Community Reinvestment Act and operational risks like talent.

“Finding employees is becoming much harder and has us [looking] at outsourcing (increased risk) or remote workers (increased risk),” writes one survey respondent. Workers want to work for ethical companies that care about their employees and communities, according to research from Gallup. Could a focus on ESG become a competitive strength in such an environment?

Key Findings

Top Risks
Respondents also reveal increased anxiety about cybersecurity, with 93% saying that their concerns have increased somewhat or significantly over the past year. Along with interest rate risk, regulatory risk (72%) and compliance (65%) round out the top risks. One respondent, the CRO of a Southeastern bank between $1 billion and $5 billion in assets, expresses specific concern about “heightened regulatory expectations” around overdraft fees, fair lending and redlining, as well as rulemaking from the Consumer Financial Protection Bureau around the collection of small business lending data.

Enhancing Cybersecurity Oversight
Most indicate that their bank conducted a cybersecurity assessment over the past year, with 61% using the Cybersecurity Assessment Tool offered by the Federal Financial Institutions Examination Council (FFIEC) in combination with other methodologies. While 83% report that their program is more mature compared to their previous assessment, there’s still room to improve, particularly in training bank staff (83%) and using technology to better detect and/or deter cyber threats and intrusions (64%). Respondents report a median budget of $200,000 for cybersecurity expenses in fiscal year 2022, matching last year’s survey.

Setting ESG Goals
While most banks lack a comprehensive ESG program, more than half say their bank set goals and objectives in several discrete areas: employee development (68%), community needs, investment and/or volunteerism (63%), risk management processes and risk governance (61%), employee engagement (59%), and data privacy and information security (56%).

Protecting Staff
More than 80% of respondents say at least some employees work remotely for at least a portion of their work week, an indicator of how business continuity plans have evolved: 44% identify formalizing remote work procedures and policies as a gap in their business continuity planning, down significantly compared to last year’s survey (77%). Further, banks continue to take a carrot approach to vaccinations and boosters, with most encouraging rather than requiring their use. Thirty-nine percent require, and 31% encourage, employees to disclose their vaccination status.

Climate Change Gaps
Sixteen percent say their board discusses climate change annually — a subtle increase compared to last year’s survey. While 60% indicate that their board and senior leadership team understand the physical risks to their bank as a result of more frequent severe weather events, less than half understand the transition risks tied to shifts in preferences or reduced demand for products and services as the economy adapts.

To view the high-level findings, click here.

Bank Services members can access a deeper exploration of the survey results. Members can click here to view the complete results, broken out by asset category and other relevant attributes. If you want to find out how your bank can gain access to this exclusive report, contact bankservices@bankdirector.com.

Handling Today’s Top Risk Challenges



Cybersecurity and compliance are the top two areas of concern for the bank executives and directors responding to Bank Director’s 2017 Risk Practices Survey, sponsored by FIS. What are the best practices that boards should implement to mitigate these risks? In this video, Sai Huda of FIS highlights the survey results and details how boards can stay proactive.

  • Cybersecurity and Compliance Gaps
  • Five Cybersecurity Best Practices
  • Three Ways to Strengthen Internal Controls

Making the Right Investment in Cybersecurity


In a January interview with Bloomberg, Brian Moynihan revealed that Bank of America Corp. has an unlimited budget for cybersecurity. “I go to bed every night feeling comfortable that group has all the money, because they never have to ask,” said the Bank of America chairman and chief executive officer. “You’ve got to be willing to do what it takes at this point.”

The vast majority of banks can’t grant carte blanche to their organization’s information security team. Bank Director’s 2015 Risk Practices Survey found that most banks, at 60 percent, dedicated less than 1 percent of revenues to cybersecurity in 2014. Thirty-eight percent allocated from 1 percent to 5 percent of revenues on cybersecurity. Two percent dedicated 5 percent of revenues to cybersecurity.

Regulators don’t mandate a minimum cybersecurity spend; how much is the right amount is up to the bank. However, banks that are prepared to battle cybercrime typically aren’t hit as hard when the inevitable data breach or hack occurs. So bank boards face some difficult decisions when it comes to protecting their bank from cybercrime. How much should the bank invest? And on what? 

Tony Buffomante, principal in information protection and cybersecurity at KPMG, says bank boards want to know what the risks are, and whether their current programs are ready to mitigate cyberthreats. Identifying the areas of the business that the bank wants to protect from a potential cyberattack—where customer account data is housed, and what processes are involved—is key to determining how much to invest in cybersecurity, and where. “If they don’t really understand what the risks are, it’s difficult to figure out, ‘Am I investing enough?’” he says.

2014 Cybersecurity Budget, By Bank Size
  All Banks >$10 Billion $5Bn to $10Bn $1Bn to $5Bn <$1Bn
Less than 1% of revenues 60% 38% 50% 59% 72%
From 1% – 5% of revenues 38% 62% 50% 38% 28%
More than 5% of revenues 2% 3%

Source: 2015 Risk Practices Survey

Cybersecurity Budget Increase for 2015, By Bank Size
  All Banks >$10 Billion $5Bn to $10Bn $1Bn to $5Bn <$1Bn
Less than 10% 52% 57% 50% 56% 42%
From 10%-25% 23% 43% 30% 23% 15%
No Increase 21% 20% 18% 35%
From 25%-50% 4% 3% 8%

Source: 2015 Risk Practices Survey

As a rule of thumb, Michael Bruemmer, vice president of the data breach resolution group at Experian, recommends that companies commit 5 percent of their revenues to cybersecurity. Two of the more technical areas that the bank’s cybersecurity budget should prioritize are intrusion detection, to detect hacks and breaches, and encryption of data to make it more secure. Bruemmer calls encryption a cybersecurity “Get Out of Jail Free Card.” Depending on state laws, companies that can prove that their data was encrypted may not have to report the breach to customers. Security breach notification laws in states such as Arizona, California and Illinois specifically reference unencrypted data.

According to a 2014 study by the Ponemon Institute, the typical data breach for the financial services industry cost $236 per record lost, but companies that followed certain practices had lower than average costs. For example, the appointment of a chief information security officer (CISO) reduces the cost of a breach by $10 per record. Sixty-four percent of respondents to Bank Director’s Risk Practices Survey say they employ a full-time CISO, a practice less common for banks with less than $1 billion in assets (44 percent).

Preventing, detecting and responding to cyberthreats is at the core of information security. Banks need expertise in understanding what the risks are, someone who can implement controls to protect customer information, as well as watch for a breach and then react to it, says Buffomante. The role may be held by multiple people within the organization, or, instead of hiring a CISO, the role can be outsourced for banks that lack that expertise on staff. 

An outsourced CISO can be just as effective, says Bruemmer. “It’s not as important who you have on staff…but that you cover all the bases, whether it is outsourced or internally.” 

The median salary for an information security officer is $75,662, according to Crowe Horwath LLP’s 2014 Financial Institutions Compensation Survey.

Bank boards should recognize that the CISO isn’t the sole guardian of the bank’s digital assets. “Executives, meaning boards and senior executives of companies, need to participate and be involved in improving their incident response,” says Bruemmer. 

Beyond technology investments, Bruemmer believes the biggest area of focus for banks should be on its employees. Training can make or break an organization’s cybersecurity efforts and investment, and Bruemmer says the root cause of most breaches is simple human error. Commonly, an employee makes a mistake and clicks a link in a phishing email, or doesn’t respond appropriately to an alert. “All of the budget expenditure in the world would not have stopped” these types of errors, he says. Employees should know not only how to prevent a breach, but how to respond to one as well. Banks need to have a plan.  

According to Ponemon, an incident response plan for cybersecurity can result in a reduction of $17 per record. These plans should be tested regularly, so the bank is prepared when a real cyberattack occurs. Seventy-six percent of respondents to the 2015 Risk Practices Survey report that their bank has a cyber incident management and response plan in place. Of these, three-quarters regularly test it.

Does your bank have a written cyber incident management and response plan?

CyberResponse_chart.png

Another investment boards should consider is cyber insurance, which can reduce the impact of a data breach by protecting the institution from customer lawsuits and covering costs like credit monitoring, customer notification and crisis management.

The Federal Financial Institutions Examination Council encourages banks to join the Financial Services Information Sharing and Analysis Center (FS-ISAC), a non-profit source for intelligence on cyberthreats, which gives banks access to information on the latest threats. The agency also plans to release a cybersecurity self-assessment tool, which will help institutions evaluate their ability to mitigate these risks. 

Bruemmer argues that the success and failure of a bank’s cybersecurity preparedness doesn’t come down to how much money is thrown at the problem. Instead, it’s more about the bank’s dedication to protecting the bank, and focusing resources on the issue. The board should play a strong role, though fewer than 20 percent regularly address cybersecurity within meetings, according to the 2015 Risk Practices Survey. Just 8 percent of respondents from banks with less than $1 billion in assets say their board addresses the issue at each board meeting. Although the board’s job isn’t to manage the bank’s security, it should provide effective oversight in terms of knowing about the bank’s security plans, staffing and resources, and making sure those are adequate.

Cybersecurity “needs to be part of the board-level strategy discussion, says Bruemmer. It “is so impactful to the organization’s ongoing reputation and viability, [and] it needs to be connected to the board level,” says Bruemmer.

Does Your Bank Need a Risk Committee?


5-30-14-emily-DC-risk.pngThe focus on the board’s role in managing risk has certainly been in the spotlight in the years following the financial crisis, with the regulatory bar raised regarding risk governance. While publicly traded institutions with more than $10 billion in assets are specifically required to establish separate risk committees of the board, many smaller banks are doing so as well. In March, Bank Director’s 2014 Risk Practices Survey found that more than half of institutions with between $1 billion and $5 billion in assets and 76 percent of those with between $5 billion and $10 billion in assets now govern risk within a separate committee. Data for institutions with less than $1 billion in assets was not collected.

When does a bank need a separate board-level risk committee? Despite the rising popularity of risk committees, many community banks have not taken this approach, but instead govern risk in the audit committee or as an entire board.

Regardless of size, banks with a more complex risk profile have a greater need to govern risk within a separate board-level committee. Not only does a more complex organization intrinsically have a more complex risk profile, its audit committee will be more heavily tasked, leaving less time to devote to risk management matters. In that situation, “the best case scenario is to have two separate committees,” says Jennifer Burke, partner at accounting and consulting firm Crowe Horwath LLP.

Jim McAlpin, partner at Bryan Cave LLP, believes it best to separate risk and audit responsibilities if the bank has qualified directors for both committees. “Not all boards have qualified directors for this,” he says. “Unless you have adequate capability on the board, it’s not helpful to have both committees.”

The ability of the board to place appropriate members on a risk committee is important, and having those skills mirror that of the bank’s audit committee may not be the best approach. The risk analysis process focuses on more than just financial risk and requires directors who can anticipate a variety of problems that could be faced by the institution. “It’s good to have directors with a compliance or risk background that are used to thinking outside of the box. The most beneficial aspect of the risk committee is anticipation,” he says. “The board can charge management to focus on areas where risks appear to be developing.”

He sees more banks bringing in new directors with these skills, and there is no shortage of qualified candidates. That said, larger institutions can better attract directors from outside the community and recruit for these skills, so risk and compliance expertise may not be found on the boards of smaller, less complex banks. “So far, the regulators understand this,” says McAlpin.

Generally, the more complex an organization is, the more likely the regulators will be to urge the establishment of a stand-alone risk committee. McAlpin recommends that a board look at how many different business lines the bank has, particularly in consumer-facing areas like mortgage lending. Over the past two years, scrutiny by the regulators on consumer compliance has grown significantly, he says, resulting in greater risk to the bank regarding these issues. Further risk analysis may also be required if the bank is involved in business lines that regulators deem to be unique or cutting edge.

The maturity of the bank’s risk management program could also dictate whether the bank is ready to establish a separate risk committee.

Crowe Horwath Partner Mike Percy says that a more mature and developed enterprise risk management (ERM) program will allow the board to better assess and monitor risk. Without the robust set of information provided through a mature ERM program, a risk committee won’t have much to contribute. “If you lead with [the risk committee] before the processes are mature, I think it just frustrates” board members, he says.

But McAlpin can see how a risk committee could precede development of an ERM program or the hiring of a chief risk officer. “The risk committee could be the body to take the steps of driving the hire of risk personnel or implementation of ERM,” he says.

A bigger bank is, typically, a more complex one, so banks with plans to grow, whether through organic means or by acquisition, may consider beefing up their approach to risk governance. Percy says that some regulators, notably the Office of the Comptroller of the Currency, consider risk committees to be a best practice for institutions approaching $10 billion in assets.

Burke says that a bank’s growth strategy should be considered when a board makes a decision to have a risk committee, and for those with a more aggressive growth plan a risk committee is a best practice. “You’re making changes, you’re growing [and] your strategy is different from what it’s been in the past,” says Burke.

Growth typically results in additional personnel, business lines and assets, particularly as the result of a merger, which could lessen the certainty that the board knows everything they need to know, says McAlpin.

“An acquisition strategy is just an additional complexity,” adds Percy. Banks with an eye to grow, particularly those above $1 billion in assets, need the infrastructure in place to support a larger organization, which could include a chief risk officer, an ERM program and a board-level risk committee.

“This side of the banking crisis, the attention to risk is greater than it was,” says Percy. Whether governed within a separate risk committee, combined with audit responsibilities or addressed as a full board, the board, along with senior management, is responsible for setting the tone for risk governance.

The Financial Stability Board, an international regulatory agency based in Basel, Switzerland, released guidance in April (“Guidance on Supervisory Interaction with Financial Institutions on Risk Culture”) that details the elements of a sound risk culture within a financial institution. Though primarily intended for an audience of large, systemically important institutions, this report provides some basic tenets that can be applied to institutions of all sizes. A key element of a sound risk culture that is perhaps the most applicable to bank directors is the establishment of an “effective system of controls commensurate with the scale and complexity of the financial institution.”

In addition to a mature ERM program, this system of controls would include proper oversight by the board. McAlpin recommends that boards work with senior management to determine what areas of risk require the board’s focus. Independent analysis should play a role in these decisions. “If the board relies only on senior management, that’s a big mistake,” he says.