The Ties That Bind: A Framework to Assess the Linkage Between Cyber Risks and Financial Stability

Recent events have made clear that both the financial system and the networks of cyberspace are inherently complex, fragile, and interdependent. This paper contributes to the growing literature on cyber risks to the financial system by presenting a high-level analytical framework to guide analysis of how a cyber-attack could cause financial instability and how financial system fragilities might be targeted by cyber attackers. The framework outlines linkages between the two sectors, particularly those which might cause contagion across the financial system. If a firm or market wants to understand systemic cyber risks in the financial sector, then conducting integrated analysis of how the various systems (technology, back office, business and financial decisions) interact and propagate shocks collectively is key. The paper is divided into four main sections: cyber risks, financial stability, the “transmission channels” by which cyber risks can induce financial turmoil, and the amplifiers and dampeners which shift the balance of risks. An appendix provides a sample set of questions designed to assist with implementation of the framework for a specific market, financial infrastructure or sector.