ESRB Presents Conceptual Model for Systemic Cyber Risk
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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Blake Coules
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.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.