Cyberattacks on Small Banks and the Impact on Local Banking Markets

Abstract

Small banks are targets of a large number of cyberattacks. Using a sized-matched difference-in-differences design, we document that successful cyberattacks decrease branch deposit growth rates at small US banks. This decrease is due to bank-specific reputational damages that erode the trust of bank customers. The loss of trust results in a reallocation of deposits within local banking market to large banks. The reallocation is the consequence of a “flight-to-reputation” by depositors since it favours primarily large banks with a high reputation. We next document that cyberattacks affect the relationships between banks and customers in mortgage markets wherein hacked banks attract riskier applicants and are forced to lower their credit standards. Ultimately, our results imply that cybersecurity investments are crucial for banks to attract and retain customers and indicate that financial constraints in small banks can lead to local banking markets increasingly dominated by large banks. We highlight how this change in market structure can affect access to credit of small local businesses and impede the development of local economies.