BIS published a working paper that examines the drivers of cyber risk, especially in context of the cloud services. The paper highlights that the use of cloud services is associated with lower costs, especially when cyber incidents are relatively small. However, as cloud connectivity increases and cloud providers become systemically important, cloud dependence is also likely to increase tail risks. The study finds that developing technological skills helps firms mitigate the costs of cyber incidents, as does more reliance on cloud services.
Cloud technology can reduce IT costs, improve resilience, and enable firms to scale better. However, the technology strengthens interdependence across firms that have shared exposures to similar (or even the same) cloud service providers. This technology enables firms to rent computing power and storage from service providers, which gives them flexibility in their storage costs. However, all of this comes with some risks, as it involves firms inherently placing a lot of trust in vendors of cloud technology. The presence of a market failure through information asymmetry between buyer and vendor is rather well-recognized. Often users of cloud services may not know the exact location of their data or the other sources of the data collectively stored with theirs. The financial sector experiences the highest number of cyber incidents (especially of a malicious type, privacy and lost data incidents). However, banks and insurance companies incur more limited losses relative to other sectors, likely due to the effects of regulation and higher investment in cyber security. Additionally, crypto-related activities, which are largely unregulated, are associated with higher losses.
Nevertheless, cloud computing can be a target for cyber criminals and could pose a concern in terms of systemic risk. Providers of cloud services, undoubtedly have some of the best cyber-security experts and ultimately provide highly secure services, but tail risks could lead to substantial losses and potentially bring the economy to a halt. Moreover, the market for cloud services is highly concentrated and there are warnings about increased homogeneity and the greater risk of single points of failure. Through shared software, hardware, and vendors, incidents could, in principle, spread more quickly, leading to higher overall costs. The impact of the use of cloud services in the case of cyber attacks can thus go both ways and clearly depends on the benefit-risk analysis. Based on this, the authors have made a hypothesis. A higher dependency on cloud technologies can alter losses from cyber events. However, the net benefit depends on the connectivity of the cyber incidents and the size of the shock.
Keywords: International, Banking, Insurance, Securities, Cloud Computing, Cyber Risk, Systemic Risk, Operational Risk, BIS
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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