Abstract
The chapter introduces the relevance of reputation for the survival of banks. It discusses the state-of-the-art cornerstones regarding reputation, reputational risk and reputational crisis in the banking industry. The main concepts related to banks’ reputations and reputational damage are explored in depth, focusing on reputational risk management and regulatory approaches for reputational risk. Based on these investigations, an original model for the analysis of banks’ reputations and reputational crises, enriched by several variables of reputational alarm, is proposed.
This chapter is the result of a collaboration between the authors. In particular, Annarita Trotta contributed to paragraphs 1, 2, and 4; Antonia Patrizia Iannuzzi contributed to paragraphs 3, 3.1, 3.2, 3.3, and 4.2; Vincenzo Pacelli contributed to paragraph 4.1.
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Notes
- 1.
Considering the relative value and not the absolute value, we delete the distortions caused by the different sizes of the banks analysed.
- 2.
The calculation method is based on the relationship between the annual interest expenses and the average of the last 2 years of the total liabilities.
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Appendix: A Model for Understanding Reputational Crisisa
Appendix: A Model for Understanding Reputational Crisisa
Reputational indicators | Description | Source |
---|---|---|
Section A—Information about the quality of stakeholder relationships | ||
A.1 Customer complaints | Check the number/increase of customer complaints | Website, financial report |
A.2 Employee reduction | Check if the bank has reduced the number of its employees | Financial report, Bankscope |
A.3 Stakeholder engagement systems | Check if the bank adopts stakeholder engagement systems | Social report |
A.4 Extrajudicial litigations (disputes) | Check if the bank is involved in extrajudicial litigations | Website |
A.5 Administrative sanctions from the National Supervisory Authority | Check if the bank managers have received sanctions by the National Central Bank | Website of National Central Bank (Supervisory Bulletin) and media |
A.6 Administrative sanctions from the National Supervisory Regulator on the markets | Check if the bank managers have received sanctions by the Financial Market Supervisory Authority | Website of Financial Market Supervisory Authority (Supervisory Bulletin) and media |
A.7 Inspections from the National Supervisory Authority | Check if the bank has received extraordinary inspections | Financial report |
A.8 Involvement in judicial investigations | Check if the bank is involved in judicial investigations | Media/national and international press |
A.9 Antitrust sanctions (check penalties) | Check if the bank has received sanctions for violations of competition rules | Antitrust Website |
Section B—Information provided by authoritative and independent actors | ||
B.1 Downgrading by rating agencies | Analyse the performance of several individual and issuer rating of the major rating agencies, Moody’s, Standard & Poor’s and Fitch. Check if the bank has suffered a downgrading and its intensity | Bankscope |
B.2 Media coverage: Negative press reports | Analyse the quality (positive/negative) of the press reporting | National/international press |
B.3 Sentences given to corporate officers (bank managers) | Check if bank managers have been convicted | National/international Press |
B.4 Other negative judgments (from, e.g., Corporate Governance or ethical agencies) | Check if other rating agencies (on Governance, on CSR) have issued negative judgments | Websites of rating agencies, Press |
Section C—Information about market measurement | ||
C.1 Contraction of the share price on the stock exchange (excluding cyclical and sectorial phenomena) | Technical analysis of share price of the bank compared to an sector index | Elaboration on financial-market data |
C.2 Increase in the sales of the bank securities in periods of falling prices | Â | Elaboration on financial-market data |
C.3 Reduction of the value of the reputational capital of banks in the financial markets | \( \mathrm{CRMF} = \left[\left(\mathrm{P}/\mathrm{B}\mathrm{V}\right) - \left(\mathrm{Roae}/\mathrm{K}\mathrm{e}\right)\right]*\mathrm{Equity} \) | Elaboration on financial-market data and Bankscope |
Section D—Information about accounting measurements | ||
D.1 Deposit contraction (measured in relative terms compared to the mean change in the industry) | Δ CRC | Elaboration from Bankscope data |
D.2 Contraction of the volumes of interbank deposits (measured in relative terms compared to the mean change in the industry, as a point D.1) | Δ CRB (bank reputational capital) | Elaboration from Bankscope data |
D.3 Economic losses in the 5 years preceding the reputational crisis | Check if the bank has suffered economic losses | Financial report, Bankscope |
D.4 Increase in the funding cost (Kd) | Interest expense on customer deposits/average customer deposits | Elaboration from Bankscope data |
D.5 Increase in the equity cost (Ke) | CAPM approach | Elaboration from financial/market data |
D.6 Amount/percentage of speculative derivatives | Â | Financial report, Bankscope |
D.7 Reduction of the degree of liquidity | Analyse the dynamics of more liquidity indicators | Elaboration from Bankscope data |
D.8 Deterioration of asset quality | Analyse the dynamics of most indicators of asset quality | Elaboration from Bankscope data |
D.9 Level and quality of capital | Analyse the capital composition of the bank and its development over the years (Tier 1 ratio vs. Total Capital ratio) | Elaboration from balance sheet data |
D.10 Leverage ratio | Check the debt level of the bank | Bankscope |
Section E—Information about ethical performance | ||
E.1 Social report | Check if the bank draws up a social report | Website of bank |
E.2 Compliance level to GRI | Check if the bank adopts the GRI model and determine the application level | Social report |
E.3 Inclusion of the bank in ethical indices | Check if the bank is included in one or more ethical indices | Analysis of the composition of the most important ethical indices |
E.4 Inclusion in reputational rankings | Check if the bank is included in reputational rankings | Analysis of reputational rankings |
E.5 Specific policy for the control/management of reputational risk | Check if the bank draws up/adopts a policy on reputational risk | Website, social report |
E.6 Policy on AML (Anti-Money Laundering) | Check if the bank draws up/adopts a policy on Anti-Money Laundering | Website, social report |
E.7 Adoption of an ethical code and publication on the website | Check if the bank adopt and publish an ethical code | Social report |
E.8 Sanctions for violations of the ethical code | Check if the bank imposes sanctions in case of violation of the ethical code | Website, social report |
E.9 Policies/procedures regarding gender diversity/financial inclusion | Check if the bank adopts procedures of financial inclusion | Social report |
Section F—Information about organizational and corporate governance system | ||
F.1 CEO duality | Check if the CEO is also chairman of the board | Corporate Governance report |
F.2 Low/modest independence of the board (% of independent directors <50Â %) | Check the board independence | Corporate Governance report |
F.3 CSR or Ethical Committee | Check if the bank has established a CSR committee | Financial report, Corporate Governance report |
F.4 Remuneration Policy | Check if the bank provides information on its remuneration policy | Corporate Governance report |
F.5 Remuneration system: – bonus even in the presence of economic losses, – no multi-year performance indicators, – high incidence of variable pay compared to the fixed regarding the CEO compensation, – no deferred compensation plan, – guaranteed bonuses and/or golden parachute | Check the level of short-termism of executive remunerations | Corporate Governance report |
F.6 Remuneration committee | Check if the bank has established a remuneration committee | Corporate Governance report |
F.7 Compliance function and/or its responsible party | Check if the bank has established a compliance function and has appointed a responsible governor of this function | Financial report, Corporate Governance report |
F.8 Gender diversity | Check the women’s presence (%) and their positions held | Financial report, Corporate Governance report |
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Trotta, A., Iannuzzi, A.P., Pacelli, V. (2016). Reputation, Reputational Risk and Reputational Crisis in the Banking Industry: State of the Art and Concepts for Improvements. In: Dell’Atti, S., Trotta, A. (eds) Managing Reputation in The Banking Industry. Springer, Cham. https://doi.org/10.1007/978-3-319-28256-5_1
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