ESRB is presenting a conceptual model for systemic cyber risk in the financial sector. One of the goals is to provide a structured approach that can be used to describe cyber incidents, from genesis to a potential systemic event. Building on this conceptual model, future work could be undertaken to study the efficacy of individual systemic mitigants; use quantitative or data-driven methods to more accurately express each phase of amplification; or further study the interaction and measurement of impact at institutional and aggregate-system levels.
The model aims to demonstrate the link between the crystallization of cyber risk in a firm-specific context (portraying micro-prudential concerns) and the possible ramifications for the financial system (applying a macro-prudential focus). Another aim of the model is to identify system-wide vulnerabilities and the unique characteristics of cyber incidents that can act as amplifiers, thus propagating shocks through the financial system. The aim is also to support the use of historical or theoretical scenario-based analysis to demonstrate the viability of the model and suggest system-wide interventions that could act as systemic mitigants. Although the model is geared toward disruption arising from cyber incidents, it can also be used for any source of operational disruption (although some elements of the model may be less relevant).
To deconstruct and describe the macro-financial implications of operational and cyber risks, the systemic cyber risk model is split into four distinct phases: context, shock, amplification, and systemic event. The context phase is useful for scenario design, but is not essential for assessing systemic vulnerabilities or relevant mitigants. It is possible to adopt a cause-agnostic approach, which ignores the circumstances of disruption and focuses solely on impact. From a micro-prudential perspective, it is important to maintain a dual focus on both idiosyncratic individual vulnerabilities and Common Individual Vulnerabilities. Measuring impact is challenging and remains primarily a judgment-based, qualitative approach. Although some quantitative indicators exist, they should be used to complement and inform impact assessments.
With regard to policy considerations arising from the model, a systemic event arising from a cyber incident is conceivable. Cyber incidents resulting in near-systemic consequences have occurred, in circumstances that can be described as “severe, but plausible.” However, a truly systemic event would require an alignment of amplifiers and a lack of effective systemic mitigants that would be “extreme, but existential” in nature. A cyber incident that causes only operational-to-operational contagion may have system-wide impact. However, the current base of evidence suggests that a systemic event requires the confidence and/or financial contagion channels to be triggered.
Related Link: Conceptual Model for Systemic Risk (PDF)
Keywords: Europe, EU, Banking, Cyber Risk, Systemic Risk, Operational Risk, Scenario-based Analysis, Historical Event Analysis, Basel, ESRB
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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