The Emerging Global Cyber War

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These opportunities range from criminals conducting financial fraud and information theft to sophisticated hackers conducting disruptive and even destructive cyber attacks. Assessing and managing systemic cyber risk remains challenging. The financial system has so far weathered larger-scale cyber attacks, but some argue that the system has not been tested for a truly systemic event.

Cyber Warfare

Data are scarce, and only rarely is cyber risk measured in terms of economic costs. Finally, modeling techniques for both idiosyncratic and systemic cyber risk are less advanced than they are for other insurable risks, and it appears that more work needs to be done to put these on a solid footing. Although companies have become increasingly aware of the need to prevent cyber breaches, the concept of systemic cyber risk remains largely abstract.

Some see cyber risk as simple operational risk—a cost component of doing business in an interconnected world—and do not factor systemic cyber risk into their risk calculus.


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Others float Armageddon-style scenarios about a massive cyber attack that would bring our modern financial and social system to its knees, though rarely in a way that is useful for risk management. In an attempt to increase the understanding of how cyber risk can potentially manifest, we present a systematization of potential cyber risk events, ranging from limited, idiosyncratic scenarios to widespread, systemic ones.


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This paper aims to help strengthen the understanding and increase the awareness of systemic cyber risk among stakeholders in the financial system. First, we discuss the properties of cyber risk, including risk aggregation and the different dimensions of cyber risk. To make cyber risk less abstract, we outline various scenarios, ranging from firm-specific operational risks to upstream infrastructure disruptions and external shocks.

Reading about possible scenarios can help policymakers develop a more comprehensive view of how cyber risk can manifest. Second, we outline a framework for assessing systemic cyber risk on the country level, based on cyber risk exposures, cybersecurity preparedness, and resilience to shocks.

Especially over the past fifteen years, the number of users and devices connected to the internet has skyrocketed. This trend has been driven predominantly by the widespread use of mobile phones throughout the world. According to Cisco, worldwide, the number of internet-connected devices increased from million in to Software flaws expose users to cybersecurity risk. Many software problems only become known when products have been used by a sufficiently large network of people.

But there are also economic incentives for software vendors to roll out products sooner than the competition, and to address security issues on the fly. No matter how careful network participants are that is, how well they manage their idiosyncratic risk , the mere use of third-party software or the internet means exposure to undiversifiable risk. Hackers exploit security weaknesses and compromise vulnerable devices to conduct cyber attacks. Threat modeling can help overcome the lack of reliable cyber risk data. The financial sector and the economy in general could be potential targets in the event of war.

Cyber risk has long been viewed mainly as an internal information technology IT security issue. Cyber risk was seen as an idiosyncratic operational risk of doing business through networks for example, the internet and of using software. Risks stemming from upstream infrastructure for example, electricity, telecommunications, financial market infrastructures or technological externalities for example, the entry of disruptive new technologies are outside the control of individual firms.

Despite the typically expansive contracting arrangements, it remains challenging to monitor cyber risk exposures even of close business partners. Risks can also arise from unanticipated external shocks, like natural disasters or armed conflict, that require government intervention. Significant uncertainty surrounds the potential financial impact of cyber events. Whereas there are relatively well understood direct costs related to cyber incidents including, for example, the cost of forensic investigation, legal assistance, customer notification, postbreach customer security, and credit protection , indirect costs are less visible, longer term, and more difficult to quantify ex-ante.

Cyber risk not only affects individual financial institutions but has an important systemic dimension. The predominance of cyber risk assessment on the level of individual institutions has grown but increasingly signals a relatively narrow view that often disregards, or inadequately includes, the systemic dimension of cyber risk to systems and networks.

Assessing systemic cyber risk is hampered by structural challenges. These arise from inexperience with large cyber events; uncertainty around how shocks would transmit; the lack of comprehensive and cohesive data about events; and uncertainties around long-term impacts of cyber breaches. Complex risk aggregation in the cyber domain has been particularly challenging for estimating the cost of past and future cyber events.

Systemic risk arises from risk concentration, risk correlation, and shock amplification. The Office of Financial Research refers to lack of substitutability, loss of confidence, and loss of data integrity as channels through which cybersecurity events can threaten financial stability.

Cyber Insecurity is Harming Emerging Markets | Global Security Review

Downtimes or defaults can impact payment, clearing, and settlement of financial transactions, with negative externalities, exposing financial institutions, markets, and participants to unexpected shocks. Interlinkages that span the financial system allow idiosyncratic shocks to spread widely and potentially become systemic. The main sources of systemic cyber risk are exposures to risk concentration via lack of substitutability; loss of confidence and risk correlation; and complex interconnections that amplify effects.

A self-replicating computer virus used an exposed nation-state-grade technology exploit as well as several other advanced techniques to infect thousands of computers. For a cyber event to leave a significant impact on the economy, many experts believe that it would have to be large. Depending on the scale of the event, the number of scenarios, and the timing of the scenarios, an initially operational event could grow into a systemic event.

A systemic cyber event could, for instance, be caused by a series of seemingly small or idiosyncratic cyber events that have cascading effects due to previously unknown linkages and dependencies among affected organizations.

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Timing will play an important role in the materialization of a systemic cyber event. Timing at the system or national level affects when certain financial sector functions are more used that is, more critical , hence increasing the impact of their loss or disruption. Because timing and triggers of financial crises are hard to predict, analysis of financial system stability focuses on identifying vulnerabilities in the system and building buffers to increase resilience to shocks.

For example, publicly traded firms are more at risk around quarterly filing time and around announcements of merger or acquisition or payout policy. An analysis of hypothetical adverse scenarios can help firms and policymakers identify and implement the most effective risk-mitigating factors. The scenario-design process requires identifying potential sources of risk, describing how the risk would affect the firm, and describing how shocks would transfer through the system.

Such thought experiments are forward-looking, can integrate the effect of future technologies, are dynamic as shocks transmit through systems , and to some extent are probabilistic. Scenario analysis can help institutions understand potential risks, how they may transmit, where investments need to be made, and how best to respond when systems are breached. The starting point is a thorough risk assessment.

12222 Theme: “How to become a global player in Cyber Security”

One of the big advantages of scenario analysis is that not only past events but also potential future events can be simulated. For a quickly evolving risk-factor like cyber, past events are not necessarily good indicators of future patterns. Below, we provide a list of actual and prospective future scenarios from which analysts can inform their own scenario selection.

Operational risk is the risk of loss resulting from failed or inadequate internal processes, people, and systems, or from external events that affect internal IT. Each country has a different susceptibility to systemic cyber risk. Assessing systemic cyber risk is challenging and made more difficult by the fact that each country has a different level of susceptibility to a major cyber event causing a shock to the financial system.

If risk managers understand the differences by country, they are better equipped to help assess the risk of a systemic cyber event materializing in a given country. Analysts can tailor the conceptual framework to their case by introducing alternative or additional measures for identifying risk exposure, the level of cybersecurity, and the types and respective sizes of available buffers. These properties require a flexible, tailored approach.

Next, we define in more detail the components of the methodology and provide for illustrative purposes a relatively simple specification of the framework. The cyber threat assessment is typically a compilation of publicly available quantitative and qualitative information. In such assessments, analysts study historical patterns of cyber attacks against a country and its financial sector using a myriad of sources.

For instance, large cyber events are more likely to be caused by nation-states or their proxies. Countries more exposed to such perpetrators have a higher likelihood of experiencing a large systemic event. One way to bring this into a quantitative framework is to assign numeric values across the threat spectrum from low to high. Relative comparisons are helped by transforming values into z-scores. The increased usage of technology and the quick adoption of new technologies increasingly provide opportunities for adversaries.

In cyber risk management, the technological exposure to cyber risk is summarized by an attack surface, which is a collection of vulnerabilities that can be exploited to carry out a cyber attack, including unauthorized accessibility. Access vulnerability risks increase with rising connectivity, which means more exposure to systemic cyber risk. Good cybersecurity practices can reduce national systemic cyber risk exposure. The majority of the financial system is privately owned, and securing the individual institutions is primarily their own responsibility.

However, national governmental institutions play a critical role in preventing crises through sound laws and regulations and by helping quickly address a large cyber event before it becomes a crisis. Through effective incident-response actions by a national computer emergency response team CERT , governments can help reduce the risk that a cyber incident in one or a few victim firms could spread widely.

Measuring cybersecurity. The index, which measures the commitment of countries to strengthen cybersecurity, is quantified as a mix of quantitative and qualitative data. It comprises five pillars legal, technical, organizational, capacity building, and cooperation and computes index values for each. In the case of a systemic cyber event, financial firms would incur losses see previous sections , and their ability to absorb shocks depends on the size and quality of their buffers.

In a last step, we combine into an aggregate indicator of systemic cyber risk the three subindices presented in this section. Conversely, countries with the lowest levels of systemic cyber risk have low levels of cyber threat and high levels of financial shock resilience. Their commitment to cybersecurity and their dependence on technology often oppose each other: one is positive while the other is negative. Technology dependence plays an outsized role in the opportunity for a cyber event to become systemic. Technology dependence is rising globally, albeit unevenly.

With increasing dependence, cyber threat increases.