Tuesday, October 13, 2009

Reputational risk – king risk

1:30 AM Posted by: Slamun Atlanta 0 comments

Is reputation risk a risk in itself or is it the consequence of other risk? According to an Economist Intelligence Unit (EIU) report in 2005 called Reputation: Risk of Risks, 52 per cent of survey respondents considered reputation risk as a risk in itself, while 40 per cent considered it a consequence of other risks. However, the report suggests there is a difference in views between corporate entities and financial services companies as to the relative importance. For the former, reputation risk is considered a risk in itself, whereas the latter consider it a second-tier risk. Furthermore, a 2008 EIU report called The Bigger Picture: Embracing Enterprise Risk Management highlighted that trust in financial services firms has been eroded owing to the credit crisis, resulting in reputational risk becoming more important now than ever before. In this latest EIU survey, 62 per cent of respondents say that protection against loss and damage to reputation is one of the most important benefits of an ERM strategy.
During the course of this chapter we will look at reputation risk, in itself an umbrella of risk, since any breach in operational, credit or market risk can directly affect a company’s reputation. Clearly, some risks have a greater effect on reputation than others, and these will be identified. The calculation of value at risk (VaR) will be explored, alongside various approaches that could be taken in expressing the cost that could be incurred by a particular risk were it to transpire. Finally the chapter will cover strategies and mitigation actions that have been used by financial services companies when an adverse event has taken its toll on their reputations.

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