Operational Risk Management: A Complete Guide to a Successful Operational Risk Framework

CHAPTER 15

Reputational Risk and Operational Risk

In this chapter we will look more closely at reputational risk and the ways that an operational risk framework can be leveraged to help identify, assess, control, and mitigate reputational risk. Examples from recent headlines will be used to highlight the significant reputational impact of most operational risk events, which often causes severe damage over and above the direct costs of the event. We will explore the causes of reputational risk and the long-term effects that it can have on a firm.

WHAT IS REPUTATIONAL RISK?

It is difficult to find an agreed-upon definition of reputational risk, but the Committee of European Banking Supervisors have offered this following:

Reputation risk: the current or prospective risk to earnings and capital arising from adverse perception of the image of the financial institution on the part of customers, counterparties, shareholders, investors or regulators.1

Reputational risk may be a misnomer, as it may be more practical to consider reputational impact. Any risk event, market, credit, operational, or strategic, can have a reputational impact. For this reason, some firms consider reputational impact in the other aspects of their risk management programs, rather than managing a separate reputational risk activity. Others do consider reputational risk as its own category and manage it using the same tools that are available for operational and strategic risk.

First, let us consider whether there ...