Systemic and cyber risk: the two monsters of financial system

Abstract

The current wave of technology-enabled financial innovation – driven by advances in data transmission and processing – is notable for its influence on the structure of the provision of financial services, which also has implications for systemic risk. Decentralisation and disintermediation of financial services enabled by digital tools may reduce risk exposure of financial intermediaries but systemic risks borne by the real sector, notably due to procyclicality of credit supply, may stay unchanged. Digitalisation enables the entry of new financial service providers, including large technology companies, which often also act as key technology providers to incumbent financial firms.Digitalisation also increases the role of cyber risk for the functioning of the financial system, both at the individual company level, as well as at the system-wide level through interconnections arising from common vulnerabilities or exposures to common infrastructure providers. The materialisation of cyber risk can also have systemic consequences, especially when it influences the trust in the financial system.Faced with these challenges, cross-topical monitoring and policy reaction is needed from public authorities, taking into account the interplay between innovation, financial stability and technology risks.