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When It Rains, It Pours: Cyber Risk and Financial Conditions

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Abstract

We analyze how systemic cyber risk relates to the financial cycle and show that the potential impact of a cyber attack is systematically greater during stressed financial conditions. This is true over the past two decades and particularly at the onset of the COVID-19 pandemic, when changes in payment activity increased vulnerability by approximately 50 percent relative to the rest of 2020 through more concentration and intraday liquidity stress. We evaluate the effectiveness of policy interventions used to stabilize markets at mitigating cyber vulnerability. We argue that cyber and other financial shocks cannot be treated as uncorrelated vulnerabilities and policy solutions for cyber need to be calibrated for adverse financial conditions.

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  • Thomas M. Eisenbach & Anna Kovner & Michael Junho Lee, 2022. "When It Rains, It Pours: Cyber Risk and Financial Conditions," Staff Reports 1022, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:94414
    Note: Revised August 2023.
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    References listed on IDEAS

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    4. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
    5. Lorie Logan, 2020. "A Return to Operating with Abundant Reserves," Speech 89102, Federal Reserve Bank of New York.
    6. Vissing-Jorgensen, Annette, 2021. "The Treasury Market in Spring 2020 and the Response of the Federal Reserve," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 19-47.
    7. Valentin Haddad & Alan Moreira & Tyler Muir, 2021. "When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response [Funding value adjustments]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5309-5351.
    8. Thomas M. Eisenbach & Kyra Frye & Helene Hall, 2019. "Since the Financial Crisis, Aggregate Payments Have Co-moved with Aggregate Reserves. Why?," Liberty Street Economics 20191104, Federal Reserve Bank of New York.
    9. James J. McAndrews & Samira Rajan, 2000. "The timing and funding of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 17-32.
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    Cited by:

    1. Jin, Justin & Li, Na & Liu, Suyi & Khalid Nainar, S.M., 2023. "Cyber attacks, discretionary loan loss provisions, and banks’ earnings management," Finance Research Letters, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    cyber; banks; networks; payments; COVID-19;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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