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

Abstract

We study consumers’ reactions in response to material privacy violations. Exploring privacy breach incidences of U.S. banks, where personally identifiable information (social security numbers, addresses, names) is exposed to unauthorized parties, we find that depositors reallocate significant wealth holdings away from breached banks – we note a 12% differential in total deposits growth between breached and control banks in the year following a breach of privacy. In response to the depletion in deposits, breached banks increase deposit rates just after breach incidences and draw on funding liquidity from the interbank market. The results highlight the importance of privacy for consumers.

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

JEL Classification: G21, D14, D18