A cyberattack on a major U.S. bank could have network effects that could cripple the financial system, a report from the Federal Reserve Bank of New York concluded. 

The study, released this month, focused on the consequences of an attack on the wholesale payments network. According to the report, an attack could affect around a third of network assets. 

In determining the scope of analysis, the Fed looked at a few key elements that characterize a cyberattack, including when the confidentiality, availability and integrity of data is compromised. Spread through interconnected tools used by banks, a cyberattack is considered a deliberate act designed to generate financial gain for the attacker. It aims to damage the financial system and nurture uncertainty, since it can be hidden for a considerable time before being detected, the study observed. 

In the event of a cyberattack, banks may respond by liquidity hoarding and foregoing payments, noted the Fed. “When banks respond to uncertainty by liquidity hoarding, the potential impact in forgone payment activity is dramatic, reaching more than 2.5 times daily GDP,” the study pointed out. 

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If a large institution stops making payments, 6% of institutions would breach their end-of-day reserves threshold. Meanwhile, in markets with less bank competition, an attack on a large bank is likely to impair a large share of local deposits.  

“Additional fragility in a geography arises when a large share of local deposits are held by banks which are more connected in the payment system,” the Fed observed. 

Small and midsized institutions are particularly vulnerable to disruption, and an attack on six small banks or one midsized institution could cripple a major bank, according to the Fed. In the event of an attack, small institutions are particularly vulnerable because of their reliance on service providers. 

“If a number of small or midsized banks are connected through a shared vulnerability, such as a significant service provider, this would likely result in the transmission of a shock throughout the network,” the study concluded. “Similarly, banks with a relatively small amount of assets but large payment flows also have the potential to impair the system.”

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