Homeland Security: Banking and Financial Infrastructure Continuity

Publication Date: March 2004

Publisher: Library of Congress. Congressional Research Service

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The Department of Homeland Security (DHS) has many responsibilities for ensuring the continuity of the "real" economy : production, distribution, and consumption of public and private goods and services Other agencies, however, have long had similar responsibilities for the "financial" sectors of the economy, which interact with the sectors DHS oversees pursuant to P .L. 107-296. DHS has some responsibilities for financial sectors through Treasury Department links. Financial agencies carry out recovery and security activities independently but also coordinately with DHS. For additional information on homeland security, please consult the CRS current legislative issue "Homeland Security," on congressional web site [http ://www.crs .gov/products/browse/is-homelandsecurity .shtml].

This report outlines recovery modes to mitigate disasters in financial markets that events have tested, and recovery arrangements . (Such disasters are of two kinds: inability to conduct transactions, and large losses of asset value .) Homeland security requires the financial institutions important in supporting and maintaining domestic and international commerce to take steps to safeguard their ability to carry out basic functions. The backbone of the financial economy-the payment system-comes through banks, and monetary policy affects them immediately . Other crucial intermediation functions come through a variety of financial companies, including brokers, exchanges, other secondary market facilities, and insurance companies . So, many regulators and trade associations need to be involved .

Regulators, especially the Federal Reserve, have set out best practice guidelines . The steps include business information technology protocols, physical security protocols, and plans for continuity of markets and participants considered critical for the nation's transactions. An Interagency Paper on Sound Practices to Strengthen the Resilience of the U . S. Financial System, as a new regulation, will likely have positive consequences for the survivability of financial businesses . Controversies have arisen, e.g., some insurers believe that federal regulators have no authority to require them to take such steps, and some in New York are concerned that the area will lose jobs as facilities become necessarily dispersed. Costs of application remain of concern . Further governmental and public-private initiatives have sought to strengthen the resiliency of the financial system's computers, in view of increasing cyberattacks .

The 107th Congress enacted legislation strengthening security for and of financial institutions and markets. Congressional interest in arrangements for safeguarding financial sectors. In the 108t h Congress, H .R. 657, as passed by the House, would strengthen the Securities and Exchange Commission's role in recovery and continuity of securities and related businesses . H.R. 2043 would address bank risks under terrorism, among other things . Hearings also examined financial security . Members may want to address financial sector arrangements in light of General Accounting Office concerns presented at the hearings . Should a financial emergency occur worse than in the blackout of August 2003, further oversight would be likely. This report will be updated as developments warrant .