03 September 2014

Stanley Epstein

Stanley Epstein - Citadel Advantage Ltd

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Operational Risk Management

To share information, ideas and experience relating to all aspects of op-risk management and compliance with Basel II

How do you price reputational risk?

19 August 2008  |  6692 views  |  4

A colleague, involved in operational risk management at a major bank, recently asked me what my feelings are regarding the quantification of the cost of reputational risk.

Was it simply something that could be taken as a percentage of revenue or net profit and then just slapped into a spreadsheet or even a balance sheet?

And the question was not theoretical either as there was pressure, coming from board level, to do just this.

To be honest this is an extremely difficult question to answer. To my mind "reputation" is an all-or-nothing event. You either have a good reputation or you don't. And in banking if you lose your reputation you are gone! It is either a 0% cost (for a pretty good reputation) or a 100%, possibly infinite cost (in which case the liquidators are already selling off the tables and chairs).

The only exception to the total loss scenario would be a return of a reasonable level of confidence (that is "reputation"). In this case the effects on bank liabilities (which directly affect its assets - and in turn revenue and ultimately profits) would depend on how quickly the bank's reputation can be saved and how much time elapses until a reasonable degree or full confidence is restored. The cost? Well, it's in there somewhere, but it will vary over time.

Or am I wrong?

It would be interesting to get a wider perspective on this ....

TagsRisk & regulation

Comments: (4)

Sriram Natarajan - Credit Risk Fraud Cards Professional - Gurgaon | 19 August, 2008, 10:33

Reputational Risk occurs when either the company's affected interest group(s) face an experience or event that alters their view/impression of the company; or the company delivers a product or service to an affected group in a manner that is inconsistent with the belief held by the affected group. So, in my view, taking this approach,for a company to measure the impact on reputation risk, it needs to quantify the effect of the above mentioned events - either in rectification and/or loss of future business and revenues. Basically, the question is how different is the firm's business / revenues from the original business plans after the occurrence of the event affecting reputation risk.

Dean Procter - Transinteract - Sydney | 20 August, 2008, 01:58

I agree Sriram, the remediation cost is one that can be easily measured long after the loss of reputation event, along with the diminished sales/profits.

More immediate indication may be taken from other businesses which have suffered similarly and average out the decline in their share prices.

Putting a number on it beforehand is difficult but an obvious indicator is  - what effort was required to achieve the original reputation?

Generally it is a lot and I'd be looking at something around three years marketing budget and whatever additional costs the event incurs directly (such as the cost of hiring a new CEO and/or Chairman).

Rajeev Nair - Accenture - Bangalore | 20 August, 2008, 04:52

Hi,

Reputation risk quantification should start from the operational segments posing threat of reputational loss. Touchpoints with every business stakeholder - customer, employee, shareholder, regulators and market at large. The cost of processes within Bank to ensure quality interactions or deliverables to these stakeholders could be one factor. Recovery costs in case of punitive efforts to recover reputation is another. As an extension, research efforts in Bank to escalate bank positioning is another contributor. Another possible way would be to list out the core values of the Bank. Then to quantify the cost of effort and time put into establish,maintain and improvise those values in the Bank.

Regards

Rajeev

Elizabeth Lumley - Finextra - London | 20 August, 2008, 11:07

But you can get into a chicken and egg thing with reputational risk.

If banks start quantifying reputational risk, and allocating capital against those risks, isn't the bank admitting that they are already engaging in activities that might effect their reputations with clients, shareholders, counterparties etc...

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