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When It Rains, It Pours: Cyber Vulnerability and Financial Conditions

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Abstract

We analyze how systemic cyber risk relates to the financial cycle and show that the potential impact of a cyberattack is systematically greater during stressed financial conditions. This has been true over the past two decades, particularly at the onset of the COVID-19 pandemic, when changes in payment activity increased vulnerability by approximately 50 percent relative to the rest of 2020 through more concentration and intraday liquidity stress. We evaluate the effectiveness of policy interventions used to stabilize markets and mitigate cyber vulnerability. We argue that cyber and other financial shocks cannot be treated as uncorrelated vulnerabilities and policy solutions for cyber vulnerability need to be calibrated for adverse financial conditions.

Suggested Citation

  • Thomas M. Eisenbach & Anna Kovner & Michael Junho Lee, 2025. "When It Rains, It Pours: Cyber Vulnerability and Financial Conditions," Economic Policy Review, Federal Reserve Bank of New York, vol. 31(1), pages 1-24, January.
    • Handle: RePEc:fip:fednep:99463
    DOI: 10.59576/epr.31.1.1-24
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    References listed on IDEAS

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    1. Anil K. Kashyap & Anne Wetherilt, 2019. "Some Principles for Regulating Cyber Risk," AEA Papers and Proceedings, American Economic Association, vol. 109, pages 482-487, May.
    2. Morten L. Bech & Antoine Martin & James J. McAndrews, 2012. "Settlement liquidity and monetary policy implementation—lessons from the financial crisis," Economic Policy Review, Federal Reserve Bank of New York, vol. 18(Mar), pages 3-20.
    3. Lacker, Jeffrey M., 2004. "Payment system disruptions and the federal reserve following September 11, 2001," Journal of Monetary Economics, Elsevier, vol. 51(5), pages 935-965, July.
    4. Anneke Kosse & Zhentong Lu, . "Transmission of cyber risk through the Canadian wholesale payment system," Journal of Financial Market Infrastructures, Journal of Financial Market Infrastructures.
    5. Gara Afonso & Anna Kovner & Antoinette Schoar, 2011. "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance, American Finance Association, vol. 66(4), pages 1109-1139, August.
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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