Abstract:

This study investigates the impact of cybersecurity risk on bank fragility. By utilizing a novel bank-specific indicator of cybersecurity, we find that an increase in cybersecurity risk raises the probability of bank default. The effect is larger for banks facing deposit withdrawal, but less pronounced for banks with ample liquidity buffers. Further we show that data security laws can help reduce the potential fragility in banking; nonetheless, the influence of cybersecurity risk remains significant. Our findings provide suggestive evidence that cybersecurity risk exacerbates financial instability, but implementing adaptation policies can strengthen resilience against possible cyberattacks.

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