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 and financial data are exposed to unauthorized parties with criminal intentions. Exploring privacy breach incidences of U.S. banks, we reveal that depositors reallocate significant wealth holdings away from breached banks (estimated at around $229 million on average in the four quarters following a privacy breach). Breached banks' deposits decline steadily after privacy breaches and do not return to the pre-breach deposit growth path even after a year. Depositors domiciled geographically closer to the breached bank's headquarters react less starkly. To counteract the depletion in deposits, breached banks sharply increase money market 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