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Does cyber tech spending matter for bank stability?

Md Hamid Uddin, Sabur Mollah and Md Hakim Ali

International Review of Financial Analysis, 2020, vol. 72, issue C

Abstract: CyberTech has drawn academic attention in the aftermath of the global financial crisis (GFC) as banks were forced to embrace CyberTech more aggressively to cope with market competition after the crisis. Banks can improve their operational efficiency and quality of service by relying on CyberTech, but they become more vulnerable to cybersecurity. Thus, increasing investment in CyberTech becomes a strategic necessity for banks to combat cybersecurity hazards. The study investigates how disruptive digital transformation affects bank stability. In particular, it examines whether the law of diminishing marginal returns from overspending on CyberTech affects bank stability. Based on a global sample from 43 countries, we find that an increase in CyberTech spending above the threshold level adversely affects the stability of banks. The main reason behind the adverse effect of CyberTech spending on the stability of banks is that banks take more than the proportional risk for every dollar they spend on disruptive CyberTech after they cross a threshold level of spending. While results persist across sub-samples, our results indicate two important channels of technological regimes – a diminishing returns regime and an increasing returns regime. The diminishing returns regime improves bank stability through more aggressive spending on technology, and the increasing returns regime makes banks more unstable due to excess spending on disruptive CyberTech. The study has implications for cybersecurity and sustainable CyberTech spending for banks.

Keywords: Bank stability; Risk-taking; CyberTech; Cybersecurity; FinTech (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.irfa.2020.101587

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