Reputational Risk in Banking: Important to Whom?

Abstract

Financial crisis and post-crisis restructuring have resulted in an increased interest in the issues of trust and corporate culture and in the creation of stable and functional risk culture in global banks. Reputational risk is not a new concept, but the efforts to manage it as a self-standing type of risk and not within an operational risk framework are quite recent. Thus the aim of this paper is to analyze why reputational risk is important for banks, and what are the incentives to manage it. In the empirical part, the panel data models for listed banks in CEE-11 countries have indicated that proper management of reputational risk may not be important for an assessment of bank performance. Consequently, there seems to be incentives to disregard reputational risk in an operational and strategic bank management and deal with it only with crisis events.

Protecting a financial institution’s reputation is among the most significant challenges facing financial firms, and trust in the integrity of the financial sector is the cornerstone of its stability and growth. The financial crisis of 2007–2009 and the post-crisis restructuring period have brought an increased interest in the reputational risk, particularly in the banking and financial sector.