Cyberattacks on Small Banks and the Impact on Local Banking Markets

This paper studies what happens to local banking markets when a small bank suffers a successful cyberattack, using a stacked difference-in-differences design on 16 cyber incidents at small U.S. banks drawn from the Privacy Rights Clearinghouse database over 2005–2017. Attacked small banks experience a deposit growth rate roughly 22 percentage points lower than matched control banks in the two years following a breach, reflecting depositors’ loss of confidence in the targeted institution’s cybersecurity capacity. The deposit attrition is sharply stronger in counties with lower digital literacy, consistent with less-informed depositors placing disproportionate weight on a visible security failure. Deposit losses do not flow evenly to all competitors: positive spillovers accrue only to the dominant or largest banks in the local market, not to other small banks, concentrating market share toward large incumbents. Affected small banks subsequently attract riskier mortgage borrowers — proxied by higher loan-to-value ratios and lower FICO scores — suggesting that the deposit-cost pressure from a cyberattack induces yield-seeking behavior. The aggregate effect is a reduction in credit access for informationally opaque small borrowers that slows local small-establishment growth.

The Effects of Regulatory Office Closures on Bank Behavior

Using closures of U.S. bank regulatory offices between 2002 and 2013 as difference-in-differences shocks to the physical proximity between supervisors and the community banks they oversee, the paper asks whether a decentralized network of local supervisory offices produces safer banks. The authors first show closures are not predicted by the risk or performance of the supervised banks — offices near a regional main office with falling workload are the ones shut — which supports treating closures as plausibly exogenous to affected banks. Following a closure, banks previously supervised by the closed office increase total lending by about 6-10% and tilt toward riskier loans (e.g., commercial real estate), and overall risk-taking as measured by the Z-Score rises by roughly 19-32% of the sample mean, with larger increases in distance to the new office associated with riskier policies. Banks affected before the 2008-09 financial crisis subsequently exhibited more bad loans, higher charge-offs, and higher failure rates during the crisis. Examining channels, the authors find affected banks report lower and less timely loan-loss provisions (and more income-increasing provisions, making balance sheets more opaque), increase dividend payouts, and see lower risk-adjusted returns on assets — which they read as evidence that proximity lets supervisors enforce timelier provisioning, restrain payouts, and share expertise. On balance the authors interpret the results as implying that geographical proximity reduces informational frictions in supervisory monitoring and leads to more stable banks — that is, the monitoring-benefit view dominates the regulatory-capture view on average.

Ivan Lim | Macro Paper Warehouse

Cyberattacks on Small Banks and the Impact on Local Banking Markets

The Effects of Regulatory Office Closures on Bank Behavior