A combined cyber attack on important banks could trigger financial instability, the head of the European Central Bank has warned.
Christine Lagarde, the ECB’s president, said that a report by the European Systemic Risk Board (ESRB) estimates the global cost of cyber attacks at between $45bn and $654bn.
“As an operator of critical infrastructures, the ECB obviously takes such threats very seriously,” she said in France on Wednesday evening. She said there were several “plausible channels” through which a cyber attack could morph into a serious financial crisis.
Ms Lagarde said an operational outage that destroyed or encrypted the balance accounts of a major financial institution could trigger a liquidity crisis. “History shows that liquidity crises can quickly become systemic crises,” she said. “The ECB is well aware that it has a duty to be prepared and to act pre-emptively.”
The report by the ESRB, which was set up by the European Commission, will look how a cyber incident could, under certain circumstances, rapidly escalate from an operational outage to a liquidity crisis.
It will say that in common with historical financial crises this liquidity crisis could, in certain circumstances, lead to a systemic crisis. At its most recent board meeting the ESRB revealed that it had identified cyber warfare as a source of risk to the financial system.
Last year, the G7 announced a joint cross-border crisis management exercise on a cyber incident affecting the financial system that it carried out in June 2019, saying that cyber risks were increasing and posed a “genuine and growing threat” to the stability and integrity of the financial sector.
It was the first exercise of its kind to be organised by finance ministries, central banks, regulators and financial market authorities. It did not reveal the results but the G7 asked its Cyber Experts Group to review financial regulation, and to look at whether the impacts could be measured better. The Trump administration is expected to take up the issue when it assumes the G7 presidency this year.
Neither the ECB not the ESRD wanted to comment further on Ms Lagarde’s remarks.
In her speech, the ECB’s president also said it needed to look the risks and opportunities of issuing central bank digital currencies to respond to changing consumer demand and to strengthen Europe’s place in the world.
Last month, the Bank of England announced it would work with the ECB and the central banks of Canada, Japan, Sweden and Switzerland to share experiences as they assess the potential cases for central bank digital currency (CBDC).
Central banks have accelerated their work on digital currencies after Facebook unveiled plans to introduce its Libra cryptocurrency and China said it was developing a digital currency.
Earlier this week US Federal Reserve board member Lael Brainard said the design of any central bank digital currency needed to address important questions surrounding financial stability.
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