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

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.