Cybersecurity and financial stability:Interconnections, risks and regulatory approaches

As digital technologies press ahead, the operation of financial systems increasingly relies on ICT systems and networks, so managing cyber security issues to maintain financial stability has become key not only for individual institutions but also at systemic level. The objective of this paper is to identify the relevant concepts, to describe the processes how systemic cyber security risks escalate and to assess international and local regulatory and institutional efforts targeting risk reduction. In the first part, the concepts of cybersecurity, cyber resilience and cyber risks are clarified with particular attention to the definitions used in the financial sector. The study focuses on the analysis of three models (framework systems offered by the IMF, the ESRB and the National Bank of Hungary (MNB) describing the escalation of how cyber security incidents affect the financial system as well as the nature of transmission channels. The author compares the logical structures, differences and applicability of the models, and makes an assessment of how the individual models can help identify and reduce systemic risks. The issues of financial stability relevant to Hungary are also presented. In the last part of the paper, the risk reduction measures to be applied in the course of managing systemic cyber risks are reviewed. Applying a three-tier approach of preventive, detective and corrective control measures, the risk reduction options available for regulators, information sharing and testing are analysed. To sum up, we emphasise the cyber resilience of the financial system can only be achieved by a multi-disciplinary approach assuming the coordinated efforts of cybersecurity and financial stability experts.