Reputation, Reputational Risk and Reputational Crisis in the Banking Industry: State of the Art and Concepts for Improvements

Abstract

The chapter introduces the relevance of reputation for the survival of banks. It discusses the state-of-the-art cornerstones regarding reputation, reputational risk and reputational crisis in the banking industry. The main concepts related to banks’ reputations and reputational damage are explored in depth, focusing on reputational risk management and regulatory approaches for reputational risk. Based on these investigations, an original model for the analysis of banks’ reputations and reputational crises, enriched by several variables of reputational alarm, is proposed.

This chapter is the result of a collaboration between the authors. In particular, Annarita Trotta contributed to paragraphs 1, 2, and 4; Antonia Patrizia Iannuzzi contributed to paragraphs 3, 3.1, 3.2, 3.3, and 4.2; Vincenzo Pacelli contributed to paragraph 4.1.

Appendix: A Model for Understanding Reputational Crisisa

Reputational indicators	Description	Source
Section A—Information about the quality of stakeholder relationships
A.1 Customer complaints	Check the number/increase of customer complaints	Website, financial report
A.2 Employee reduction	Check if the bank has reduced the number of its employees	Financial report, Bankscope
A.3 Stakeholder engagement systems	Check if the bank adopts stakeholder engagement systems	Social report
A.4 Extrajudicial litigations (disputes)	Check if the bank is involved in extrajudicial litigations	Website
A.5 Administrative sanctions from the National Supervisory Authority	Check if the bank managers have received sanctions by the National Central Bank	Website of National Central Bank (Supervisory Bulletin) and media
A.6 Administrative sanctions from the National Supervisory Regulator on the markets	Check if the bank managers have received sanctions by the Financial Market Supervisory Authority	Website of Financial Market Supervisory Authority (Supervisory Bulletin) and media
A.7 Inspections from the National Supervisory Authority	Check if the bank has received extraordinary inspections	Financial report
A.8 Involvement in judicial investigations	Check if the bank is involved in judicial investigations	Media/national and international press
A.9 Antitrust sanctions (check penalties)	Check if the bank has received sanctions for violations of competition rules	Antitrust Website
Section B—Information provided by authoritative and independent actors
B.1 Downgrading by rating agencies	Analyse the performance of several individual and issuer rating of the major rating agencies, Moody’s, Standard & Poor’s and Fitch. Check if the bank has suffered a downgrading and its intensity	Bankscope
B.2 Media coverage: Negative press reports	Analyse the quality (positive/negative) of the press reporting	National/international press
B.3 Sentences given to corporate officers (bank managers)	Check if bank managers have been convicted	National/international Press
B.4 Other negative judgments (from, e.g., Corporate Governance or ethical agencies)	Check if other rating agencies (on Governance, on CSR) have issued negative judgments	Websites of rating agencies, Press
Section C—Information about market measurement
C.1 Contraction of the share price on the stock exchange (excluding cyclical and sectorial phenomena)	Technical analysis of share price of the bank compared to an sector index	Elaboration on financial-market data
C.2 Increase in the sales of the bank securities in periods of falling prices		Elaboration on financial-market data
C.3 Reduction of the value of the reputational capital of banks in the financial markets	$\mathrm{CRMF} = \left[\left(\mathrm{P}/\mathrm{B}\mathrm{V}\right) - \left(\mathrm{Roae}/\mathrm{K}\mathrm{e}\right)\right]*\mathrm{Equity}$	Elaboration on financial-market data and Bankscope
Section D—Information about accounting measurements
D.1 Deposit contraction (measured in relative terms compared to the mean change in the industry)	Δ CRC	Elaboration from Bankscope data
D.2 Contraction of the volumes of interbank deposits (measured in relative terms compared to the mean change in the industry, as a point D.1)	Δ CRB (bank reputational capital)	Elaboration from Bankscope data
D.3 Economic losses in the 5 years preceding the reputational crisis	Check if the bank has suffered economic losses	Financial report, Bankscope
D.4 Increase in the funding cost (Kd)	Interest expense on customer deposits/average customer deposits	Elaboration from Bankscope data
D.5 Increase in the equity cost (Ke)	CAPM approach	Elaboration from financial/market data
D.6 Amount/percentage of speculative derivatives		Financial report, Bankscope
D.7 Reduction of the degree of liquidity	Analyse the dynamics of more liquidity indicators	Elaboration from Bankscope data
D.8 Deterioration of asset quality	Analyse the dynamics of most indicators of asset quality	Elaboration from Bankscope data
D.9 Level and quality of capital	Analyse the capital composition of the bank and its development over the years (Tier 1 ratio vs. Total Capital ratio)	Elaboration from balance sheet data
D.10 Leverage ratio	Check the debt level of the bank	Bankscope
Section E—Information about ethical performance
E.1 Social report	Check if the bank draws up a social report	Website of bank
E.2 Compliance level to GRI	Check if the bank adopts the GRI model and determine the application level	Social report
E.3 Inclusion of the bank in ethical indices	Check if the bank is included in one or more ethical indices	Analysis of the composition of the most important ethical indices
E.4 Inclusion in reputational rankings	Check if the bank is included in reputational rankings	Analysis of reputational rankings
E.5 Specific policy for the control/management of reputational risk	Check if the bank draws up/adopts a policy on reputational risk	Website, social report
E.6 Policy on AML (Anti-Money Laundering)	Check if the bank draws up/adopts a policy on Anti-Money Laundering	Website, social report
E.7 Adoption of an ethical code and publication on the website	Check if the bank adopt and publish an ethical code	Social report
E.8 Sanctions for violations of the ethical code	Check if the bank imposes sanctions in case of violation of the ethical code	Website, social report
E.9 Policies/procedures regarding gender diversity/financial inclusion	Check if the bank adopts procedures of financial inclusion	Social report
Section F—Information about organizational and corporate governance system
F.1 CEO duality	Check if the CEO is also chairman of the board	Corporate Governance report
F.2 Low/modest independence of the board (% of independent directors <50 %)	Check the board independence	Corporate Governance report
F.3 CSR or Ethical Committee	Check if the bank has established a CSR committee	Financial report, Corporate Governance report
F.4 Remuneration Policy	Check if the bank provides information on its remuneration policy	Corporate Governance report
F.5 Remuneration system: – bonus even in the presence of economic losses, – no multi-year performance indicators, – high incidence of variable pay compared to the fixed regarding the CEO compensation, – no deferred compensation plan, – guaranteed bonuses and/or golden parachute	Check the level of short-termism of executive remunerations	Corporate Governance report
F.6 Remuneration committee	Check if the bank has established a remuneration committee	Corporate Governance report
F.7 Compliance function and/or its responsible party	Check if the bank has established a compliance function and has appointed a responsible governor of this function	Financial report, Corporate Governance report
F.8 Gender diversity	Check the women’s presence (%) and their positions held	Financial report, Corporate Governance report

1. ^aThis Appendix is the result of a collaboration between Stefano Dell’Atti, Annarita Trotta, Antonia Patrizia Iannuzzi and Vincenzo Pacelli