Banking system stability: A global analysis of cybercrime laws

TL;DR

This study demonstrates that the enactment of cybercrime laws worldwide significantly improves banking system stability, especially in countries with strict penalties, effective enforcement, and international cooperation, by enhancing liquidity and reducing operational risks.

Contribution

It provides the first comprehensive empirical analysis linking cybercrime legislation to banking stability across diverse countries, highlighting key legal and enforcement factors.

Findings

Cybercrime laws increase bank stability across countries.

Stronger effects in jurisdictions with harsher penalties and better enforcement.

Laws improve stability by boosting liquidity and reducing operational risks.

Abstract

We examine the role of cybercrime legislation around the world in shaping the stability of the banking system. We compile a novel dataset covering the enactment of cybercrime legislation in 132 developed and developing countries to empirically test this research question. We find that the enactment of cybercrime laws enhances the stability of the banking sector. This key finding holds across a comprehensive suite of robustness tests, including alternative measures of bank stability and model specifications. We document significant cross-sectional heterogeneity, with the effect being more pronounced in countries with heavier penalties for illegal cyber activities and legal frameworks that hold banks accountable for their cybersecurity practices. In addition, the positive impact is stronger in jurisdictions with greater international legal cooperation and effective enforcement mechanisms. We further investigate two channels (i.e., funding liquidity and operational risk) through which cybercrime laws may influence bank stability. Our results indicate that these laws can significantly bolster bank stability by enhancing funding liquidity and mitigating operational risk. Overall, our study highlights the crucial role of cybercrime legislation in fostering a secure and resilient banking environment. It offers new insights into how these laws contribute to bank stability on both individual and systemic levels.