Finance and Economics Discussion Series (FEDS)
May 2022
Cyberattacks and Financial Stability: Evidence from a Natural Experiment
Antonis Kotidis and Stacey L. Schreft
Abstract:
This paper studies the effects of a unique multi-day cyberattack on a technology service provider (TSP). Using several confidential daily datasets, we identify and quantify first- and second-round effects of the event. For banks using relevant services of the TSP, the attack impaired their ability to send payments over Fedwire, even though the Federal Reserve extended the time they had to submit payments. This impairment (first-round effect) caused other banks to receive fewer payments (second-round effect), leaving them at risk of having too few reserves to send their own payments (a potential third-round effect). These innocent-bystander banks responded differently depending on their size and reserve holdings. Those with sufficient reserves drew down their reserves. Of the others, smaller banks borrowed from the discount window, while larger banks borrowed in the federal funds market. These significant adjustments to operations and funding prevented the second-round effect from spilling over into third-round effect and broader financial instability. These findings highlight the important role for bank contingency planning, liquidity buffers, and the Federal Reserve in supporting the financial system’s recovery from a cyberattack.
DOI: https://doi.org/10.17016/FEDS.2022.025
PDF: Full Paper
Related Materials: Accessible materials (.zip)
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.