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 ....