ESRB published a report that explores systemic implications of cyber incidents, such as cyberattacks. The report summarizes the latest estimates of the costs of cyber incidents and shows that a cyber incident could evolve into a systemic cyber crisis that threatens financial stability. It also describes when an incident might turn into a “systemic cyber incident” that could threaten financial stability. Finally, the report outlines policy areas that merit further exploration, with the ESRB announcing that it intends to explore some of the potential systemic mitigants in its future work.
The report highlights that cyber risk is characterized by three features that, when combined, make it fundamentally different from other sources of operational risk: the speed of its propagation, the scale of its propagation, and the potential intent of perpetrators. ESRB has developed an analytical framework to assess how cyber risk can become a source of systemic risk to the financial system. The four stages of this conceptual model (context, shock, amplification, systemic event) facilitate a systematic analysis of how a cyber incident can grow from operational disruption into a systemic crisis. The framework could assist in analyzing systemic vulnerabilities that amplify the shock of a cyber incident and in understanding at which point a cyber incident may become systemic. ESRB also surveyed its membership to form a view on common individual vulnerabilities across ESRB jurisdictions. Combining these elements, ESRB has considered a number of historical and hypothetical scenarios. It used these scenarios to try to understand the distinction between severe operational disruption to the financial system and a systemic crisis.
The ESRB analysis illustrates how a cyber incident could, under certain circumstances, rapidly escalate from an operational outage to a liquidity crisis. Standard-setting bodies, national and international authorities, and industry groups are combining their efforts to mitigate cyber risks. To further mitigate the risk of a systemic cyber incident materializing, more work is required to address system vulnerabilities and reduce the potential for widespread disruption through amplification channels. The scenario analysis in this report reveals that the loss of confidence in the financial system plays a key role in a cyber incident developing into a systemic crisis. The following are a number of policy areas that merit further exploration:
- Given the speed and scale at which such a cyber incident may unfold, rapid coordination between stakeholders and a consistent and clear communication from authorities may be required to shore up confidence. Different ongoing workstreams could be leveraged to achieve this goal.
- Effective restoration of key economic functions requires planning, including agreeing on a clear division of tasks between industry and authorities and between (technical) incident management and (financial) consequence management. This may also include reflections on central bank emergency communications, interventions, or assistance when a cyber crisis becomes a financial stability crisis.
- Cyber-equivalent of capital buffers is preparedness and resilience. Thus, the operationalization of systemic resilience mechanisms such as data vaulting, among other things, merits further exploration. This is of particular importance as many recovery and resolution plans are contingent on the essential data being available or recoverable.
ESRB intends to explore some of the potential systemic mitigants in future work. Taking stock of the findings in this report, ESRB intends to leverage its broad institutional composition and network to evaluate the costs and benefits of different systemic mitigants going forward.
Keywords: Europe, EU, Banking, Insurance, Securities, Cyber Risk, Systemic Risk, Operational Risk, Financial Stability, 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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