In a new study from the Federal Reserve Bank of New York, a cyberattack targeting one of the largest banks in the United States would have a major impact throughout the financial system. The study takes a look at how a single cyberattack would have a ripple effect throughout the United States’ financial system if banks lost the ability to process payments among each other. If this takes place, nearly one-third of all the country’s assets would be impacted.
The Spread of a Cyberattack
The potential for a major financial fallout is waking some banks up to the potential losses they could incur. For instance, last year, Capital One lost the personal information of more than 100 million customers due to a data breach, causing millions of dollars in damage. One way the impact could be limited is for banks to invest in cyber liability insurance that protects the bank’s own assets and reputation during a crisis like this. Another way to limit risk is to cultivate awareness around the severity of this growing issue in the financial sector.
For instance, the real concern has to do with spillover from bank to bank. While smaller banks may not feel that they are targets, even if they’re not directly hit during a cyberattack, they could feel the effects. The study from the Federal Reserve of New York illustrates that if a cyberattack hits any of the five most active U.S. banks, such as Wells Fargo or Bank of America, smaller banks will be also be hurt.
Smaller banks have fewer resources to defend against a large-scale attack and are easier to target. A cyberattack on multiple smaller banks or one mid-sized bank could do some significant damage to one of the United States’ larger banks.
The overall severity of a cyberattack also depends heavily on how well thought-out a cyberattack is and whether the hackers have enough information about the U.S. payment system and specific banks, according to the report. An attacker with specific knowledge of a bank could create an attack on a particular day that could end up having a greater disruption on the financial sector.
A Growing Concern
Cyberattacks, in general, have picked up steam in recent years. From hotel chains to online streaming services, no industry is immune to the reach of a cyberattack. For U.S. financial firms, cyberattacks pose a very real and very wide-reaching threat.
Financial firms and other financial institutions experience up to 300 times more cyber incidents throughout the year than other sectors. The impact that a cyberattack would have on a financial institution would increase if the banks responded by not sending out payments and compiling their assets. This would lead to a wave of issues because other financial institutions would not be receiving payments from the bank that was hit and could end up being short on their own money reserves.
One situation that the researchers at the Federal Reserve of New York considered looks at if the targeted bank can receive payments but is unable to send out those payments to other banks for a single day. While this window of time may seem small, in those 24 hours the affected banks would be put into what researchers call a liquidity black hole due to stockpiling payments but not being able to send them out.
About Financial Guaranty Insurance Brokers
Since 1983, Financial Guaranty Insurance Brokers has distinguished itself as a provider of Professional Liability, Cyber Liability, and Crime insurance products for entities of all types. To receive timely, personalized service from a knowledgeable and experienced staff, call us today at (626) 793-3330 to speak with one of our professionals.