Managing Reputation Risk

Sergio Scandizzo

Modern banks are like women in Victorian times: their reputation is their most important asset and the most difficult thing to recover once it has been lost. Indeed, expectations about the virtues of financial institutions have now hardened to the point that the value of a bank’s reputation is, so to speak, impossible to underestimate.

In this chapter, we will design a framework for the analysis of reputational risk in a financial institution. The aim is not just to discuss definitions and dimensions, but also to determine concrete metrics and methodologies that can be used to identify, assess, monitor, report and control reputation risk. We will start with a brief review of the main approaches to the subject of corporate reputation, before proceeding to look at the nature of reputation and reputation risk. Then, the chapter will address the problem of assessing the two main kind of reputation risk: internal and external, and conclude with a discussion on the process of managing reputation risk.

REPUTATION RISK: APPROACHES AND MODELS

The role of reputation in banking has been studied by, among others, Fang (2005) for investment banks and Ross (2010) for commercial banks. The