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FRM Part II · FRM Exam Part II · Digital Resilience and Financial Stability: The Quest for Policy Tools in the Financial Sector

A central bank wants to test whether the sector can withstand a cyber event. A stress scenario assumes that a major service provider failure leaves 3 of the 10 largest banks unable to process payments. Direct operational losses are modest. Which conclusion about measuring the systemic impact is most appropriate?

Indirect effects such as liquidity hoarding, counterparty uncertainty and payment delays can dominate the outcome, so measuring only the sum of direct operational losses understates systemic impact, even when direct losses appear modest.

  1. ASystemic impact is captured by summing each bank's direct operational loss, since losses are additive
  2. BThe scenario is irrelevant because direct losses are modest
  3. COnly capital ratios, not liquidity or interconnections, matter
  4. DIndirect effects such as liquidity hoarding, counterparty uncertainty and payment delays can dominate, so measuring only direct losses understates systemic impactCorrect

Explanation

Systemic cyber impact arises mainly through second-round effects: liquidity hoarding, delayed payments and confidence loss across interconnected firms. Summing direct losses ignores these nonlinear channels, so it understates the true impact even when direct losses are small.

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