UT Wordmark Primary UT Wordmark Formal Shield Texas UT News Camera Chevron Close Search Copy Link Download File Hamburger Menu Time Stamp Open in browser Load More Pull quote Cloudy and windy Cloudy Partly Cloudy Rain and snow Rain Showers Snow Sunny Thunderstorms Wind and Rain Windy Facebook Instagram LinkedIn Twitter email alert map calendar bullhorn

Information and resources related to COVID-19


UT News

We Have a Significant Financial System Risk

Remember the “Great Recession?” Led by a trillion-dollar loss in collateralized debt obligations, the financial system came dangerously close to collapse. The regulators clearly did not understand the extent of the risk in these securities.

Columns appearing on the service and this webpage represent the views of the authors, not of The University of Texas at Austin.

Two color orange horizontal divider

Remember the “Great Recession?” Led by a trillion-dollar loss in collateralized debt obligations, the financial system came dangerously close to collapse. The regulators clearly did not understand the extent of the risk in these securities. Even the managers of the financial institutions did not appear to understand the risks they were taking.

If you enjoyed that recession, you will love the next one. We have a significant financial system risk that could make the “Great Recession” look minor.

For years we have heard about security breaches of credit card companies, financial information and email services. The good news is that you do not hear too many reports of anything being stolen. In other words, if the security breaches were the work of criminal networks, you would expect the information to be used quickly.

But that has not happened in mass scale. Most of the stories you hear about credit card fraud still hinge on the capture of information from a specific physical breach and, as expected, these are typically monetized very quickly to act before the breach is detected.

If these huge breaches are not the work of criminal networks, they may be state or terrorist sponsored. These sponsors have an interest in draining as much money as possible, but they may also have a significant interest in disrupting the American financial system.

In 2012, two-thirds of payments made in the United States were made by payment cards. If those transactions could be halted, it would have a devastating effect on the economy. Almost everyone has heard of “denial of service attacks,” when hackers drive millions of transactions at a particular site, overwhelming the servers and shutting them down.

Now consider such an attack using millions of fraudulent credit card transactions. These attacks would drain as much money as allowed out of the banks, and each issuing bank would be on the hook for losses of more than $50 per customer.

The attacks would overwhelm the security functions of the banks, in effect driving a possible shutdown of the system that handles two-thirds of daily transactions in the United States.

Neither the financial system nor individuals are prepared for a shutdown of the credit card processing network. Most people no longer carry enough cash to make the purchases they normally charge to their cards, so almost a panic would ensue as they rush to try to handle this new financial environment.

The resulting effect on the economy, as well as the effect on Americans’ feelings of security, would be devastating.

Our security agencies are doing an outstanding job of trying to address these issues and intercept many attacks, but they can’t do it alone. Two issues must be addressed.

First, the banking regulators need to immediately begin reviewing the preparations of issuing banks to handle a massive credit card fraud attack and ensure that these preparations will work if needed. The banks must have viable plans in place to instantly identify and work their way through such an attack.

Second, the financial institutions must actually begin to work with the intelligence agencies in what Director of National Intelligence James Clapper referred to as a “joint effort” to stop cybercrime. This is just one of several possible scenarios for serious financial cyberattacks. We need the joint effort to prevent whatever scenario may come.

As Yogi Berra is often quoted as saying, “The future is hard to predict, because it hasn’t happened yet.” These attacks haven’t happened yet, but I can predict that it’s only a matter of time, and our financial system must act now to ensure that we are protected.

John Highbarger is a lecturer of marketing in the McCombs School of Business at The University of Texas at Austin.

Related op-eds on Texas Perspectives:
What You Should Know About Those Apps Your Kids Want to Download
Employers Should Give Prospective Hires More Space, Anonymity Online
Want Job Security? Jobs of Tomorrow will be in Service, Applying Manufacturing Technologies

To view more op-eds from Texas Perspectives, click here.

Like us on Facebook.

Share this story on Twitter:


Media Contact

University Communications
Email: UTMedia@utexas.edu
Phone: (512) 471-3151

Texas Perspectives is a wire-style service produced by The University of Texas at Austin that is intended to provide media outlets with meaningful and thoughtful opinion columns (op-eds) on a variety of topics and current events. Authors are faculty members and staffers at UT Austin who work with University Communications to craft columns that adhere to journalistic best practices and Associated Press style guidelines. The University of Texas at Austin offers these opinion articles for publication at no charge. Columns appearing on the service and this webpage represent the views of the authors, not of The University of Texas at Austin.

The University of Texas at Austin