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Concentration risk and banks’ IT vulnerabilities

Do people remember all those years back, at the time of the financial crash of 2008, about how so many wrote and spoke about dangers of an over-concentrated banking system, “too big to fail”, moral hazards of bailouts, poor risk management, etc? I do. I cannot count the articles, conferences, talks, books and videos about all this, and the lessons that must be learned.

Well, here we go:

There is, however, a bigger and simpler problem that financial-stability supervisors have been growing concerned about: The over-reliance of banks and markets on a limited number of third parties for things like cloud-computing services, software and risk-modelling tools. The UK, for example, found that 65% of British financial firms used the same four cloud providers. And earlier this year, the International Monetary Fund dedicated a chapter of its annual Financial Stability Report to cyber risks, noting that the world’s biggest systemically important banks were growing increasingly reliant on common information-technology providers. The IMF found a greater overlap in major banks’ use of the same IT products and services than was the case for insurers or asset managers.

The comment is by Paul J Davies, a writer for Bloomberg ($). He is writing about the implications of the Microsoft/Crowdstrike outage that slammed banks, airlines, healthcare providers and others last Friday and through the weekend.

Besides the level of “fragile” reliance on a few systems, is the fact that this saga, in my mind, makes it even more dangerous to proceed with things such as digital identities (an idea of Tony Blair), central bank digital currencies, and the rest of it. I think I need to re-read the Nassim Taleb book, Antifragile.

23 comments to Concentration risk and banks’ IT vulnerabilities

  • bobby b

    I wonder if Taleb wouldn’t just tell us that the Falcon update failure was a necessary and beneficial occurrence that will ultimately strengthen our systems, that we learn through failure, and that we learn a LOT through massive failure.

    Of course, he was probably never stuck in the Atlanta airport for three days. 😉

  • Any idea of Tony Blair is a bad one

  • Paul Marks

    There are indeed software problems – but also there is a basic hardware problem to electronics.

    Another solar flare on the scale of the “Carrington Event” in Victorian times is inevitable – it will happen.

    Back in Victorian times little, other than the telegraph system, was electrical – so even a large solar flare did not cause crippling problems.

    Now such a scale of solar flare would cripple electrical systems – not just bringing down banks, but also bringing down everything else, for example power and water systems (yes water systems are electronically controlled now – everything is), because everything is now vulnerable to a natural (perfectly natural – and inevitable) Electro Magnetic Pulse (EMP).

    It is quite true that both computers and power grids could be hardened to deal with such a problem – but they have not been.

    Instead we get an obsessions with C02, and the totalitarian obsession with controlling every aspect of life
    via “Digital Currency” so that governments and “partner corporations” can control spending – turning what W.H. Hutt called “consumer sovereignty” on its head (into slavery – in all but name).

    So even basic things such as protecting computers, and the power grid, from being knocked out – are neglected.

    The rulers of our world show zero interest in protecting the people from real threats (threats that could be guarded against by, basically, simple protection work) – instead they stress imaginary threats, in order to have an excuse for totalitarian controls.

  • Discovered Joys

    I resisted the original national ID card idea when Tony Blair (spit) suggested it. Although I could see that it could be useful I thought that ‘mission creep’ and the Labour Party’s drive to Utopia would soon see that nothing could be done without a National ID card and that the police would be demanding ‘your papers please’ whenever it suited them.

    Since then the ‘value’ of having an ID card has increased – but so has my fear of politicisation and fragility of the underlying computer systems. We already fear ‘debanking’ – what would de-IDing be like?

  • Johnathan Pearce

    Discovered Joys: We already fear ‘debanking’ – what would de-IDing be like?

    I don’t know, but it would not be good.

    That’s a very good question, and a candidate for Samizdata Quote of the Day.

  • Paul Marks

    Discovered Joys – even if they do not “de-ID” us deliberately, they are going to do so accidently. Because they have not hardened the computers and the electrical power grid.

    There is a tendency in the Western world to be obsessed with imaginary problems, such as C02 or “the toxic white heterosexual male”, and totally ignore real problems – be it Credit Bubble banking (lending out money that does-not-exist) or the inevitability (yes – inevitability) of a large scale solar flare as large, or larger, than the “Carrington Event”.

    Massive, and incredibly expensive, efforts are devoted to dealing with imaginary problems – but hardly any effort is put in to deal with real dangers.

  • Paul Marks

    Johnathan Pearce – “de-IDing” was dealt with in the old television series “1990” (not go be confused with the science fiction show 1999).

    In 1990 a democratically elected Labour Government establishes a totalitarian system – under the Department of Public Control, which can, for example, remove your I.D. card and make you a “non citizen” not recorded anywhere and unable to buy food or do anything else. Basically killing you without, itself, executing you.

    I suspect that such a television series would not be made, or shown, today.

  • llamas

    There’s lots of things I don’t know much about, but I know quite-a-bit about EMPs. And most of what’s projected about the possible effects of a large electromagnetic storm, such as the Carrington Event, is very much overblown. The potential damage that can be caused by an Electro Magnetic Pulse is in direct proportion to the speed of the pulse.

    The speed of the Carrington Event pulse – the rate of rise and fall of the electric field it generated – was measured in hours. To seriously-damage any sort of modern electrical or electronic equipment requires rates measured in nanoseconds – 10E-9 seconds – and electric field strengths significantly-higher that can be generated by a solar-induced electromagnetic storm.

    Just consider that significant electromagnetic storms occur all over the world, every day, including very-significant, if-localized, pulse events – lightning strikes – producing local electric fields much-stronger than what a solar storm can achieve. And the world does not collapse. Modern aircraft, packed with the most-advanced electronics, regularly sustain direct lightning strikes with no ill effects.

    If you would like to experience the kinds of electric fields that were generated by the Carrington Event, find a low-hanging high-voltage transmission line and go stand under it. You can illustrate the electric field by taking with you an old-style fluorescent tube light bulb, which will light spontaneously when correctly oriented. But the modern electronics in your pocket will be unaffected, and indeed, untold millions live and work in these kinds of electric fields with no effects whatever.

    The effects produced by the Carrington Event – sparking telegraphs and such – were due to the fact that telegraphs of that era were single-wire ground-return systems.

    Most of the hype about Carrington Event-style EMP events comes from confusing them with HEMP events. HEMP – High-altitude Electro Magnetic Pulse – events, typically due to thermonuclear explosion within the atmosphere – are a very different kettle of fish. Due to the nature of the Earth’s electromagnetic outer coverings, these events can propagate pulses of much-shorter duration and much-higher field strengths than any solar event, and these can do real damage.

    llater,

    llamas

  • Paul Marks

    Thank you llamas – I hope you are correct.

  • Paul Marks

    According to what I have just heard (via television) from the new Prime Minister of the United Kingdom (Prime Minister’s Question Time) – economic growth is created by building prisons, housing estates and roads over the fields of Kent and other counties.

    This will delight the banks and other “City” entities – as it means even more borrowing (borrowing of money created from nothing) by governments and house builders.

    A real economy is about the production of food, raw materials and manufactured goods – but that does not seem to be “modern” enough for the Western elite.

  • NickM

    llamas is correct. I’ve got a question for llamas though… We all know about aircraft flying through lightning storms. Does it matter what they are made of? I assume duralumin works as an excellent Faraday cage but what about composites? I also didn’t know that about fluorescent tubes. I have seen it done with Tesla coils but they are very high voltage.

  • NickM

    Paul,
    I’m no economist but… OK… I think you’re slightly wrong on that. Whilst the things you mention matter there is also “added value”. It’s a bit like this. I have seen what the “cost” of a human body is if you cost it on all the carbon in terms of coal and it is very low. If you cost it in terms of all naner of complex chemicals that need to be synthesised then… Or to put it another way. Someone is making money mining the stuff they make computer chips out of. Someone is making more money refining those things. Someone is making money making the chips* and then the computers and let’s say those machines get used for CGI movies. Then Pixar et. al. are making the real cash.

    *TSMC is a serious single point of failure here. They make a stunning percentage of chips. If/when the Reds roll into Taipei we is all truly buggered. Oddly enough TSMC is building three factories in Arizona… Interesting, that. The odd thing is if the PRC go full on they’ll take nothing of value. Even if they take the plants as a whole, undamaged then have they got the engineers? Oddly enough the most patriotic thing a Taiwanese electronics wiazard could do is get out, not fight to their last breath. Whoever is next US Prez, whether it is Mr Satsuma or Ms Coconut has to supply Taiwan with top-end anti-ship missiles so if the PRC play Les Buggeurs Risible the PLAN ends up at bottom of the Taiwan Strait.

  • Scott

    What about the pulse in the 70s that caused the electric grid failure in Canada and New York

  • llamas

    @NickM – well, now.

    Aircraft, regardless of what they are made of, are actually extremely inefficient as Faraday cages, on account of all the holes and conductive pass-throughs in the outer skin. But it’s a useful shorthand for ‘the tendency of charge to propagate over conductive plane surfaces in preference to conductive narrow channels’. Aircraft structures perform well enough to effectively disperse most of the charge of a lightning discharge across most of the outer skin of the structure, most of the time, although some of the charge eventually gets inside the outer skin. But the effects of that charge tend to be thermal – it burns holes in stuff – rather than secondary, electromagnetic effects. But even so, things like nose radars (which are outside the main skin of the airplane, are often disrupted and sometimes damaged by electromagnetically-induced currents.

    All that being said, most lightning discharges onto aircraft actually pass through the airframe on the way to somewhere else, so while the current may be high (= burns stuff) the voltage gradient may actually be quite low. And a lightning discharge is relatively-slow compared to (say) a HEMP event.

    Carbon fibres themselves are quite conductive, but only lengthwise. Single-layer carbon-fibre-reinforced materials are much-more conductive (so many fibres, and usually laid in many directions) but also strongly anisotropic – they conduct quite well in the plane direction, since that’s where all the fibres go, but very poorly through the thickness. The more layers, the better the plane conductivity, and it doesn’t have to be (relatively) very high conductivity to effectively disperse large amounts of charge. IIRC, the normal carbon fibre composites as used in aircraft, which are about 1/4″ thick, have between 15 and 25% the plane conductivity as the equivalent duralumin material, and that’s generally enough. As I understand, for some shapes and in some places, manufacturers are incorporating layers of metal foil or mesh into the carbon fibre composite to provide additional shielding effect.

    But again, it doesn’t have to be very good to work well. Be it remembered that the great rigid airships, filled with highly-flammable hydrogen, typically need no more than a coat of dope loaded with aluminum powder to be more-or-less immune to lightning, and they were struck all the time. Due to their enormous size, they were also prone to many other electrical effects, such as St Elmo’s Fire, as well as the charges that they generated themselves by passing through the air. Surface area is the key.

    llater,

    llamas

  • NickM

    llamas,
    Thanks. very informative.

  • Nicholas (Unlicensed Joker) Gray

    Here in Australia, we have a similar debate about cards versus cash. Can companies compel customers to use cards instead of cash? The answer in Australia seems to be yes. Still, I came up with the Middleman idea- that someone could pay a person to buy the goods from a company so the person in the middle was on the records, but not the ultimate recipient of the goods. “I gave that away as a gift to a friend of mine, John Smith.” You might end up giving a lot of stuff to John Smith, but generosity is not yet a crime.

  • NickM

    Is it possible to use in-game currencies (that can be bought with “real” money) such as Robux for purchases outside the game? Just wondering because I can see epic posibilities.

  • Runcie Balspune

    The problem with cloud computing, not that they are actually on the cloud as that is way too insecure, they are “private cloud”, is that the provider offers a Procrustean solution making every machine a cookie cut replica and open to malicious intent.

    Banking IT, an industry I have worked in for over 30 years, long abandoned the idea he technical ability was an asset and got deluded by the cheap and easy solutions of the “as a service” brigade, and now they’re discovering why it is so cheap.

    When I started, many investment banks had their own operating systems and programming languages.

  • NickM

    Runcie,
    There are lots of problems with the cloud. The one that is rarely mentioned is how cheap HDD/SSD kit is. I have no need for cloud services for my data. Unfortunately the IT companies don’t get this and want my cloud custom in so many ways it is much more complicated than keeping my stuff on my own drive with multiple back-ups in various places.

  • John Dougan

    I think you are confusing the 1968 northeast blackout with the 1972 solar storm.

    The blackout was related to mis-set protection equipment in a Niagra power station. This caused a cascade failure as power lines overloaded and tripped more protection equipment, which caused more oveloads, and so on. We’ve learned from that, and the next time (2003) it was from a different problem.

    The solar storm did cause a lot of problems, especially with hardware in orbit. Radio comms were disrupted, and really long wires carrying power and telephony were unstable until the protection systems kicked in. It has now been declassified that about 4000 magnetic-influence sea mines off the coast of Vietnam detonated as a result. As far as I can tell though, no giant blackout in he northeast.

  • John Dougan

    You can theoretically use anything as a currency, so long as there is mutual agreement that it has value. “I gave him 12 polished seashells, and I got a hamburger”. The govt has processes to determine value of barter at tax time, so it isn’t unheard of.

    I you could do it with Second Life currency as it has posted value in USD which makes agreement easier.

  • Paul Marks

    Nick M – I did not follow your comment, what are you saying I am wrong about? I have read your 1225 comment a couple of times – but I still do not know what you mean.

    I may indeed be wrong about the danger of a large scale solar flare – but you seem to be writing about something else.

    If (if) you are saying that an economy of millions (indeed tens of millions) of human beings can be based on creating money-from-nothing and using this money to import food, fuel and manufactured goods – then it is you who is mistaken, not me. But I am not sure that this what you are saying.

    For the record (not that it will do any practical good now) – Western Credit Bubble economies, such as the United Kingdom and the United States, whilst they still have quite a lot of production of raw materials, food and manufactured goods, are quite insane – and are going to collapse.

    If anything the United Kingdom is in a much worse position than the United States.

    The only positive thing that can be said is that the United Kingdom, over the next five years, will be a terrible warning to the world – and that other countries may learn to avoid these errors by observing the terrible things that are going to happen here.

    In this we will do some good.

  • Paul Marks

    John Dougan.

    President Martin Van Buren was correct.

    Take in taxes in physical gold and silver (or one of these two – do NOT try and fix the exchange rate between them), and pay out the money, from a real Independent Treasury, as required by government spending – strictly limited government spending.

    Do not put any tax money in a national bank – OR in State level “pet banks” – as both national and State level banks will pyramid Credit on top of any cash put in them, thus creating a bubble – a Boom-Bust.

    Both California and Oregon stuck to physical gold money even during the Civil War.

    There is no need to physically carry the money about – electronic means may be used to transfer ownership of the gold or the silver, but pyramiding credit on top of the physical money must be strictly forbidden as the fraud that it is.

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