Cyber Risk and Bank Fragility

Abstract

This study investigates the impact of cyber risk on bank fragility. Using a novel firm-level measure of cybersecurity, we find that cybersecurity risk increases the probability of bank default. The effect is larger for banks with deposit withdrawal, but less pronounced for banks with liquidity buffer. Our results are robust to using an instrumental variable approach and to using alternative measures. Further, we find that cyber risk leads to substantial increase in systemic risk. Our findings provide suggestive evidence that cybersecurity risk exacerbates financial instability, but an adaptation strategy could build resilience to potential cyberattacks.

Keywords: cybersecurity, cyber risk, financial stability, distance-to-default, bank default probability, systemic risk, bank fragility, cyberattacks

JEL Classification: G15, G32, G38, Q54