Is reputational risk important for bank performance? Evidence from CEE-11 countries

Abstract

The 2007-2009 revealed the weaknesses of the growth foundation and failure of risk management systems in large global banks. Consequently, there has been renewed interest in the creation of stable and functional risk culture. Protecting a financial institution’s reputation is among the most significant challenges facing financial firms. Thus the aim of this paper is to analyze why reputational risk is important for banks, and to trace its sources and consequences. In the empirical part, the paper proposes a new method to measure reputational risk: Stakeholder Reputation Score (SRS). The panel regression models are used to examine the impact of the SRS indicator on bank performance, for listed banks in the CEE-11. The estimation results indicate that the efforts to enhance bank reputation may not have a positive effect on bank performance, which may explain why many banks deal with reputational risk mainly in the context of minimizing loss after a scandal, rather than treating it as a strategic, long-term goal

Reputational Risks in Banks: A Review of Research Themes, Frameworks, Methods, and Future Research Directions

“…The measurement of reputational risks is the least studied research issue with 5 articles. This is consistent with the difficulty with measuring reputational risks (Gatzert et al, 2016;Miklaszewska et al, 2020); although, awareness has increased considerably, relative to other risks (Heidinger & Gatzert, 2018). The review identified two strands of literature on the measurement of reputational risks in banks.…”

“…Strategy related mitigation factors include, identification of broader stakeholder expectations, aligning strategy with higher order goals (Tăchiciu et al, 2020), inter alia. Management related mitigation factors involves the preparation of an organization to deliver on its commitments (Miklaszewska et al, 2020), increasing reputational risks awareness (Trostianska & Semencha, 2019), inter alia. Governance related mitigation factors include transparency in environmental, social and governance policies, effective reputational monitoring system, adoption and implementation of the Equator principles (Mason & Ying, 2020;Banhalmi-Zakar, 2016;Eisenbach et al, 2014), standard model for the reporting of non-financial results, remuneration policies, and self-regulation (Saleuddin, 2014), inter alia.…”

“…Following the global financial crisis (GFC), reputational risk has become one of the most significant risks confronting banks. The crisis and post-crisis periods have put trust in the integrity of the financial sector on a downward trend, as misconduct and unethical managerial behavior in the pre-crisis period get exposed (Miklaszewska, Kil, & Pawłowska, 2020;Tăchiciu, Fülöp, Marin-Pantelescu, Oncioiu, & Topor, 2020). Consequently, confidence in banks decrease drastically following financial crisis, and this phenomenon manifested in the increased public opposition to banks' rescue (Miklaszewska et al, 2020).…”

“…The crisis and post-crisis periods have put trust in the integrity of the financial sector on a downward trend, as misconduct and unethical managerial behavior in the pre-crisis period get exposed (Miklaszewska, Kil, & Pawłowska, 2020;Tăchiciu, Fülöp, Marin-Pantelescu, Oncioiu, & Topor, 2020). Consequently, confidence in banks decrease drastically following financial crisis, and this phenomenon manifested in the increased public opposition to banks' rescue (Miklaszewska et al, 2020). This expression of a lack of confidence in the social responsibility of banks resulted in increased disclosure requirements (Tăchiciu et al, 2020) as well as the enactment of stringent prudential regulations and new prudential powers for central banks to uphold financial stability (Born, Ehrmann, & Fratzscher, 2012;Hungin & James, 2019).…”

“…In the banking sector, reputational risk management (RRM) frameworks are still underdeveloped (Fiordelisi, Soana, & Schwizer, 2013;Zaby & Pohl, 2019) and reactive, suggesting that RRM of banks are developed mainly in the context of minimizing losses after a scandal, rather than as a strategic, long term goal (Eccles, Newquist, & Schatz, 2007;Trostianska & Semencha, 2019).This may be attributable to a delay in understanding the significance of reputational risks (Tăchiciu et al, 2020;Zaby & Pohl, 2019) and difficulty with its measurement (Gatzert, Schmit, & Kolb, 2016;Miklaszewska et al, 2020); although, awareness of reputational risks has increased considerably, relative to other risks (Heidinger & Gatzert, 2018).Over the last decade, numerous studies have discussed various themes in RRM, including sources/determinants of reputational risks (Fiordelisi et al, 2013;Zaby & Pohl, 2019), measurement (Miklaszewska et al, 2020;Trostianska & Semencha, 2019), implications (Fiordelisi, Soana, & Schwizer, 2014;Gillet, Hübner, & Plunus, 2010), and mitigation measures (Zaby & Pohl, 2019) What are the methodologies adopted by previous studies on reputational risks in banks? (5) What are the most frequently identified research frameworks adopted in the study of reputational risks in banks?…”