Reputational risk management in local credit institutions

Abstract

Nowadays, competition in the financial industry is greater than ever. Corporate responsibility is also emphasized in media and social networks. Consequently, reputation has become a new benchmark for a company’s success and a means to increase competitive advantage. It takes years to build a reputation; however it is easily destroyed in minutes, resulting in serious damage for the institutions. Nonetheless because reputational risk is still evolving and is difficult to measure, it is often not included in an overall risk management strategy. Purpose: The purpose of this study is to analyse the importance given to reputational risk by local credit institutions. It seeks to analyse whether local banks mange reputational risk and if they comply with the best practices in reputational risk management. Furthermore, it seeks to determine whether there is a need for regulation or common policy in this area and possible improvements or amendments. Design: The objectives of this study were achieved through five semi-structured interviews with risk managers and persons competent in risk management, from their respective banks. Findings: The results of this study show that reputation is considered to be one of the greatest assets of a bank. Reputational risk is managed by all banks albeit in different ways and without a clear process. Due to its intangible nature and also the fact that it is still evolving, reputational risk is considered to be a challenging risk to manage and measure compared to other risk categories. Reputational risk is also managed through other risk categories, since all banks agreed that it is interlinked with other risks. A reputational risk policy is also present in more than half of the banks interviewed. Conclusion: It can be concluded that reputational risk management is gaining importance within the local credit institutions. Although all banks manage reputational risk in some way or another, there is still lack of knowledge on the matter and there is no structured process to manage this risk. Having a common risk policy with guidelines and best practices on how to manage reputational risk could help the banks manage reputational risk in an optimal way following the best practices on reputational risk management.