The Cost of Privacy Failures: Evidence from Bank Depositors’ Reactions to Breaches

Abstract

This paper provides novel evidence that consumers react in response to privacy breaches, where personally identifying information is exposed to unauthorized parties. Exploring privacy breach incidences of U.S. banks, we reveal that depositors reallocate significant wealth holdings away from breached banks (estimated drop in deposits of 15% in the first six months following a privacy breach). Breached banks' branches located in the same county as their headquarters and in competitive markets see deposits decline sharply after a privacy breach. To counteract the depletion in deposits, bank branches increase deposit rates just after breach incidences. The results highlight the real cost of privacy breaches for corporations.

Keywords: privacy, cyber-security, data breaches, banks, deposit institutions, depositors

JEL Classification: G21, D14, D18