From Cyber Shocks to SME Distress: Evidence from the Bank Credit Channel

Recent geopolitical tensions have heightened concerns that cyber incidents could disrupt real activity and spill over into the financial system. Cyber events at small and medium-sized enterprises (SMEs) are often treated as idiosyncratic operational problems, but this view can be misleading: SMEs are key supply-chain nodes and depend disproportionately on bank-intermediated finance, so cyber stress can raise perceived borrower risk and tighten credit through an operational-to-financial transmission channel. Using incident-level cyber loss records, we construct two transparent quarterly U.S. SME cyber-stress indices capturing (i) a productivity/residual-cost wedge, \A ̂_S^cyber, and (ii) operational disruption and impairment, \z ̂_S^cyber. We link these shocks to borrower-size-specific terms in the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS, 2000Q2--2025Q3) and to bank outcomes and exposures from FFIEC Call Reports.In SLOOS, a one-standard-deviation increase in \A ̂_S^cyber raises the net share of banks tightening small-firm C\&I standards by 4.213 percentage points and the net share reporting wider spreads by 6.231 points; \z ̂_S^cyber yields comparable tightening (4.475 and 6.332 points) and lowers reported loan demand by 6.209 points. In bank panels, the shocks reduce quarterly small-business loan growth by 1.19 pp (\A ̂_S^cyber) and 0.32 pp (\z ̂_S^cyber) for banks at the 75th versus 25th percentile of small-business exposure, increasing credit losses and operating costs (higher net charge-offs and noninterest expenses). Local projections reveal delayed, persistent effects, with slower recovery in tight-funding or high-risk regimes and occasional non-recovery within 12 quarters. Our indices provide a transparent, SME-focused monitoring tool for integrating cyber stress into credit surveillance and stress testing.