What Is a Reputation Risk?

On August 25, 2009, the "Guidelines for the Management of Commercial Banks' Reputational Risks" issued by the CBRC defines: Reputational risk refers to the operation, management, and other behaviors or external events of commercial banks that cause stakeholders to Risk of negative bank evaluation.

Reputation risk

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On August 25, 2009,

Reputation risk

In the January 2009 Basel Committee new capital agreement draft, the reputation risk was clearly listed as the second pillar, becoming one of the eight major risks of commercial banks, and it was pointed out that banks should incorporate reputation risk into the risk management process and internally Credit risk is adequately covered in the capital adequacy and liquidity plans. Internationally, financial regulatory agencies in the United States regard reputation as an important part of supervision, and require supervisors to effectively evaluate the reputation of banks, and point out that reputational risk is a basic indicator that regulators must consider in risk assessment. Reputation risk refers to the risk of negative evaluation of a commercial bank by stakeholders due to its operation, management and other actions or external events. Reputation events refer to related behaviors or events that trigger the reputational risk of commercial banks. Major reputation events refer to reputation events that cause major losses in the banking industry, large market fluctuations, trigger systemic risks, or affect the stability of social and economic order. Different from other financial risks, reputation risk is difficult to measure directly, and it is difficult to separate and deal with other risks independently. A good reputation is an important resource accumulated by a bank over many years of development. It is the basis of a bank's survival and is well maintained.

Reputation risk content

(1) Clarify the strategic vision and value concept of commercial banks;

(2) Well-documented reputational risk management policies and procedures;

(3) Understand the expectations of different stakeholders (such as shareholders, employees, customers, regulators, the public, etc.);

(4) Cultivate an open, mutual trust, and mutual aid organizational culture;

(5) Establish a strong and dynamic risk management system, capable of providing early warning of risk events;

(6) Strive to build a learning organization and have the ability to correct problems in a timely manner;

(7) Establish a fair reward and punishment mechanism to support the realization of development goals and shareholder value;

(8) Use its own values and ethics to influence partners, suppliers and customers;

(9) Establish open and sincere internal and external communication mechanisms to meet the requirements of different stakeholders as much as possible;

(10) Clearly documented crisis management / decision making processes.

Reputation risk

(1) Recruiting and retaining the best employees;

(2) ensure the premium level of products and services;

(3) Reduce obstacles to entering new markets;

(4) Maintain the loyalty of customers and suppliers;

(5) Create a favorable environment for the use of funds;

(6) Enhance relations with investors;

(7) Strengthen their own credibility and the confidence of their stakeholders;

(8) Attract high-quality partners and strengthen their competitiveness;

(9) Minimize litigation threats and regulatory requirements.

Basic risk reputation practices

(I) Clarify the responsibilities of the board of directors and senior management

The board of directors and senior management are responsible for formulating reputational risk management policies and operating procedures for commercial banks. Under their direct leadership, they independently establish reputational risk management functions and are responsible for identifying, evaluating, monitoring and controlling reputational risks. In addition to formulating normal risk management policies and procedures, the board of directors and senior management should also formulate crisis handling procedures and regularly conduct scenario analysis and stress tests on reputational risks in accordance with their own circumstances in order to deal with possible management confusion and major losses caused by emergencies . The board and senior management are ultimately responsible for the results of reputational risk management.

The board of directors and senior management shall regularly review the reputation risk management policy, urge all employees to be familiar with the relevant policies, and actively encourage rigorous working methods and attitudes within commercial banks. According to the scale and business complexity of commercial banks, the board of directors and senior management lead by example, strictly abide by ethics and conflict of interest policies, and actively participate in reputational risk management activities, which is essential to achieve the reputational risk management goals of commercial banks.

Senior management should ensure that commercial banks can fully identify and timely deal with events that may cause reputational risks, accurately assess and report on compliance with reputational risk management policies, correctly identify and review early warning indicators, and take action in the event of non-compliance with operating procedures Appropriate follow-up measures.

(II) Establish a clear reputation risk management process

1. Reputation risk identification: cross-existence and interaction with credit, market, operation, liquidity and other risks

Commercial banks usually require various business units and important positions to regularly list the major risks they currently face and the risk factors they contain through a checklist method, and then extract the risk factors that may affect reputation and report to reputation risk management. department(

2. Reputation risk assessment

The key of reputation risk assessment lies in a deep understanding of what potential holders expect of a commercial bank in a potential risk event, and how a commercial bank should respond to this.

The reputation risk management department can adopt methods such as prior investigation to understand the typical customers or the public's attitudes to possible changes in the business management activities of commercial banks in order to predict as accurately as possible the positive or negative results of such changes. Commercial banks often need to make a pre-assessment of reputational risk events including:

The market expects the profitability of commercial banks;

Costs / benefits of commercial bank reform / restructuring;

Adverse information / events ordered by the supervisory authority for rectification;

Policy changes that affect customers or the public (such as adjustments in business venues, business hours, and service charges).

3. Monitoring and reporting

The reputation risk management department is on the front line of reputation risk management. It should be aware of the concerns of various interest holders at all times and correctly predict their possible reactions to the business, policy or operation adjustment of commercial banks. At the same time, the reputation risk management department should carefully analyze and monitor the opinions / comments received, and use an effective report and response system to timely report the positive and negative evaluations or actions of the stakeholders to the commercial bank, all communication records and results. , And the countermeasures that commercial banks should take, after refining and sorting, report to the board of directors and senior management in a timely manner, and the top management formulates the final reputation risk response plan.

Reputation risk management should become an important part of the daily work of business units. Although many commercial banks have incorporated reputational risk management policies into their business areas and related financial products, commercial banks still need to ensure the effectiveness of reputational risk management policies through regular internal audits and on-site inspections.

(3) Adopting appropriate reputational risk management measures

Up to now, domestic and foreign financial institutions have not developed effective quantitative techniques for reputation risk management, but it is generally believed that the best practices for reputation risk management are:

(1) Promote comprehensive risk management concepts, improve corporate governance, and prepare for crisis prevention in advance;

(2) Ensure that various risks are correctly identified, prioritized, and effectively managed.

The specific practices of reputation risk management are:

Strengthening reputation risk management training

Ensure that commitments are fulfilled

Ensure timely handling of complaints and criticisms

Maintain the expectations of the majority of stakeholders as much as possible consistent with the development strategy of commercial banks

Enhance transparency to customers / public

Combining corporate social responsibility and business objectives of commercial banks is another important aspect of creating public transparency and maintaining the reputation of commercial banks.

Maintain good contact with the media

Develop a crisis management plan

Reputation risk planning

Reputation crisis management should be based on good ethics and the public interest, and if it can be properly handled before the regulatory authorities take action, it will achieve better results.

The main content of reputation crisis management:

Make strategic crisis management plans in advance;

Improve the ability to solve daily problems;

crisis site treatment;

Improve the communication skills of the speakers;

Continuous communication during crisis management;

Managing information exchange during crisis process;

Simulation training and exercises