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Cyber Threats in International Financial System

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Nowadays, ‘international’ term has become the need of every one. The concept of the closed economy does not exist anymore and every business wants to go global. Every individual wants to work abroad, study abroad, travel abroad, wear international brands, etc.

So, for the security of trillions of people, who are operating their global business from their homes, or the people who are dealing globally, shopping from various international websites, investing in the international stock markets or who are somehow connected with the foreign world through internet, we need to understand and control the cyber threats in international financial system as this system provides the platform for international trade as it provides foreign exchange, exchange rates, rules and regulations for exchange, etc.

Also, in the era of digitalisation, almost every global business is operating online, advertising online, transacting online, staffing online, etc. and the security of the online portals, the online systems, the online customers and the online money and a complete knowledge about various threats and their sources is the necessity of everyone in the system.

A financial system is an intermediary which links savings with investment by linking lender with the borrower. This maintains the circular flow of income in an economy and a strong financial system is the main reason behind the growth of an economy. The financial system is categorized into formal or organized financial system and informal or unorganized financial system.

The formal financial system consists of:

a) financial products like securities, insurance, etc.;

b) financial services which are either fund based or fee-based services;

c) financial institutions which are also known as financial intermediaries as they act as an intermediary between lenders and borrowers;

d) regulatory system which regulates financial system; and

e) financial markets which constitute capital and money market. The formal financial system is in control of the government of the country.

The informal financial system consists of: a) traders;

b) landowners;

c) moneylenders, and

d) pawnbrokers.

These are not under the control of the government.

The international financial system is a financial system which finances international trade and investment by interconnecting different countries which act as a trader or borrower or lender and making the world, a global economy. This provides the platform for developing international relations and optimum utilization of resources is possible due to the international financial system. The system is undergoing a colossal structural change due to crises in Greece, Russia, Brazil, Europe and other parts of the world; the Global Financial Crises and the collapse of Lehman Brothers in 2007-08, one of the biggest investment bank in the world; the stock market crash in China; and various regulatory changes in the world.

The international financial system consists of:

Global Financial Institutions: International Fund for Agricultural Development, World Bank, International Monetary Fund, International Finance Corporation etc. are the various financial institutions which provide funds, provide a medium for exchange, assist countries, etc. They are the subjects of international law and are incorporated by joint efforts of different countries of the world.

Regulatory System: Bank for International Settlements, International Monetary Fund World Trade Organisation, and World Bank are the main regulatory bodies which govern the international financial system. These bodies provide finance for trade, set up international standards and help in creating international law. They facilitate international trade by providing a medium for exchange, providing member nations the title of “Most Favoured Nation (MFN)”, setting up rules and regulations for international trade, providing a forum for dispute settlement and they perform various other functions to integrate the world into a single global economy.

Financial Markets: It is a platform where financial wealth or assets is traded between countries and individuals which are in surplus or deficit. The mechanism allows the purchase and sale of shares, debentures, bonds, securities, commodities, and services. For example, Foreign Exchange Market where funds are converted from one currency to another.

Financial Services: Trade financing, foreign investment, foreign exchange, banking, investments and long-term loans are some of the services provided by the international financial system.

Financial Products: The international financial products are the developing capital, either provided by the international financial institutions like World Bank or by international investors; loans provided by various international financial institutions; mutual funds; securities; bonds etc. which are available to the world.

Money: Money serves as a medium for exchange which is generally accepted for the payments of goods and services and for reflecting the cost of goods and services.

The four periods international financial system

1. The Gold Standard, 1870-1914: Under this system, the countries used to set up their currency’s value in terms of a particular amount of gold, like, in the US, 1$ = 23.22 fine grains of gold. During this era, there was no restriction on import and export of gold. The paper currency and coins were issued with a gold backing and there was free convertibility available. The main problem during this era was that the money supply depends on gold discoveries.

2. Flexible Rates and Control, 1914-1944: This was the crucial First World War period. The nations applied currency restrictions and the people were no more facilitated with the service of free convertibility of their paper money into gold. There existed hyperinflation in many countries after the First World War, and to control it, the gold standards were readopted. Many countries revalued their currencies to attain their objectives and this benefited other countries, for example, the case of France and Britain. This period led to the failure of the gold standard as nothing except US dollars was exchangeable for gold.

3. Bretton Woods and the International Monetary Fund (IMF), 1944-1973:

Changes in international financial system

1. A Finance Policy Committee (FPC) has been established, which is responsible for system risk.

2. A Prudential Regulatory Authority (PRA) has been established which is responsible for oversight of safety and soundness of banks and insurers.

3. A Financial Conduct Authority (FCA) has been established which is responsible for investor protection, market supervision and regulation, the business conduct of banks and financial services, and civil and criminal endorsement of market abuse rules.

4. Stronger capital requirements for banks.

5. Setting up of global liquidity standards.

6. Establishment of new standards for pushing large exposures and enhancing risk management.

7. Raising up of supervisory standards of international banks.

8. Setting up “cross-border crisis management groups” composed of authorities from the most evident jurisdictions where international banks operate.

9. International accounting standards are altered (newly issued IFRS9).

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