Reputational losses and operational risk in banking

TLDR

Reputation is a key asset for trust‑based firms such as banks, yet studies on reputational risk in finance remain scarce. The study estimates the reputational impact of announced operational losses for a large sample of European and U.S. banks between 1994 and 2008. The authors employ an event‑study methodology on operational loss announcements.

Abstract

Reputation is a key asset for any company whose affairs, like those of banks, are based on trust. Despite its importance, the number of studies dealing with reputational risk in the financial industry is still limited. We estimate the reputational impact of announced operational losses for a large sample of banks (both commercial and investment) in Europe and the USA between 1994 and 2008. By conducting an event study, we show that substantial reputational losses occur following announcements of 'pure' operational losses. We provide evidence that 'fraud' is the event type that generates the greatest reputational damage. 'Trading and sales' and 'payment and settlement' are the two business lines determining considerable reputational losses. We also found that losses are higher in Europe than in North America.