Fed’s Atlanta president warns of risk from underfunded public pension plans, cybercrime

Federal Reserve Bank of Atlanta President Dennis Lockhart on Tuesday told a Berlin conference that financial regulators need to be vigilant in identifying risks, including the underfunding of public pension plans and cybercrime at banks.

“At a global level, the span of vigilance needs to be extremely broad,” Mr. Lockhart said in prepared remarks at the Levy Economics Institute’s Hyman P. Minsky Conference on Financial Stability. “The events of 2007 and 2008 brought many surprises,” he said. “Markets that some thought too small to cause much trouble ultimately posed systemic-scale problems.”

U.S. regulators are grappling with how to identify threats to financial stability more than four years after the collapse of Lehman Brothers Holdings Inc. The Dodd-Frank Act tightening post-crisis supervision created a council of regulators to monitor sources of instability.

Mr. Lockhart didn’t comment on the U.S. economic outlook or monetary policy in his prepared remarks.

U.S. states and municipalities face pension funding shortfalls of as much as $3 trillion or $4 trillion, when conservative investment returns are assumed, Mr. Lockhart said. While pensions may not trigger a financial crisis, the health of state and local governments contributes to economic stability, he said.

“The situation needs to be monitored,” Mr. Lockhart said. “The public pension funding problem, as it grows, has the potential to sap the resilience we wish for to withstand a future spell of financial instability.”

He also expressed concern over “the potential for malicious disruptions to the payments system in the form of broadly targeted cyberattacks.”

“Banks and other participants in the payments system will need to reevaluate defense strategies” in light of increasing attacks by “sophisticated, well-organized hacking groups,” he said.