Operational Risk Management, 2nd Edition

CHAPTER 15Reputational Risk and Operational Risk

In this chapter we 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 are used to highlight the significant reputational impact of most operational risk events, which often cause severe damage over and above the direct costs of the event. We explore the causes of reputational risk and the long-term effects that it can have on a firm.

Reputational risk is a critical concern for both fintechs and banks. Losing the trust of your customers can be a fatal blow to a firm's strategic plan, its growth trajectory, and investor confidence.

WHAT IS REPUTATIONAL RISK?

Regulatory guidance on the definition of reputational risk was fairly slim until the impact of the 2007 financial crisis made it clear that banks needed to do more to ensure that this risk type was well managed. The Bank of International Settlements (BIS) published comprehensive guidance on this area that became effective in December 2019. In this guidance they provided a definition for reputation risk:

Reputational risk can be defined as the risk arising from negative perception on the part of customers, counterparties, shareholders, investors, debt-holders, market analysts, other relevant parties or regulators that can adversely affect a bank's ability to maintain existing, or establish new, business relationships and continued ...