This document discusses the need for banks to take a holistic approach to managing reputation risk. Currently, most banks silo each type of risk (e.g. credit, market, operational) without considering how they interconnect and impact reputation. The document advocates looking beyond individual risk departments to foster a culture where all employees understand how their actions can affect reputation risk. It also suggests learning from other industries' reputation risk practices and using new technologies like analytics and social media monitoring to proactively manage this critical intangible asset.

1. Needed, A Holistic Approach to Reputation
Risk Management in Banks
Universal Banking Solution System Integration Consulting Business Process Outsourcing

2. In 2011, when American citizens were still reputation, which as mentioned before, is at risk
feeling the ill effects of the financial crisis, a from all other risks. Effective risk management
well-known U.S. bank decided to impose a calls for replacing the current silo framework
US$5 monthly fee on debit card usage, impervious with a holistic approach, with Customer Trust
to the prevailing customer sentiment. This and Employee Belief as the supporting columns,
seemingly innocuous decision sparked serious as depicted in Fig. 2.
outrage to fuel the Bank Transfer Day protests
wherein people shifted in droves from “big bad Management of Risk Islands in Banks
banks” to customer-friendly credit unions.
Credit Market
Operations
Reputation or goodwill, that invaluable asset of Risk Dept. Risk Dept.
the banking industry, is also probably its most
fragile one. Reputation risk or the risk of loss of Audit Business
Branches Treasury
Risk Dept. Units
reputation is also called “risk of risks”, as it often
comes on the heels of other risks in banking, Operational Liquidity Legal
but differs from them in that it is intangible and Risk Dept. Risk Dept. Risk Dept.
hard to measure.
Compliance
Reputation & Control Risk IT &
Indeed, even defining reputation risk can be a Risk Dept. Dept. Infrastructure
challenge, according to Dr. Jean Paul Louisot,
who said that, “There’s no such thing as
reputation risk… rather all risks may have an
impact on an organisation’s reputation.” But its CORRELATION OF RISKS IN BANKS
impact is felt in no uncertain terms as negative
publicity, litigation, loss of revenue, clients,
partners and key employees, decline in share Market Liquidity
CONFIDENCE
Risk Risk
price, and difficulty in recruiting talent.
TRUST
Reputation
Unfortunately, most banks view the risk of Operational
Risk Risk
Credit Risk
reputation loss as a standalone problem, failing
to recognize that all other risks, namely credit, Sovereign Legal Risk
market, operational, liquidity etc., feed into it. For Risk
instance, the operational risk of data theft by
employees, the credit risk associated with heavy
lending exposure to a single industry, the Origination of Reputation Risks in the Banking
market risk inherent in instruments like credit Process
swaps or stocks, can all snowball to hit banks’
hard-built reputation. In the context of day-to-day banking, the threat
of reputation loss lurks under the surface at
Need to Look Beyond Silos every stage, whether it is customer prospecting,
onboarding or transaction processing.
It is not reputation risk alone that is managed
in silos. Fig. 1 illustrates how banks typically Prospecting
deal with each risk individually. The problem
with having islands of risk is that the banks Banks put their reputation on the line even
do not know the size of the (risk) problem. as they approach customers during the
Moreover, individual risk management teams prospecting stage. Often, sales executives cold
act to mitigate only a single type of threat, taking call prospective customers who currently have
no cognizance of the impact of their actions on no need for the bank’s products. Such calls,
other types of risk. especially when repeated, annoy customers
and might even alienate them forever. Who
Clearly, such a disparate risk facing mechanism hasn’t been harassed by telemarketing executives
is not best equipped to guard the banks’ selling loans?
Needed, A Holistic Approach to Reputation
Risk Management in Banks

3. In their desperate attempts to sell, banks often the customer.
onboard customers with doubtful antecedents,
who go on to engage in fraudulent activities While the best policy is to anticipate and avoid
and ruin their banks’ reputation. This is frequently such situations, the next best thing is to react as
seen in the case of credit cards, personal loans etc. quickly as possible to arrest the damage.
Customer Conversion Customer Communication
It is relevant to discuss one of the softer
Central Bank guidelines mandate banks in most
aspects of customer retention, namely, customer
countries to run their new customers through
communication, in the context of reputation
Know Your Customer (KYC) checks. However,
risk. Banks are often (maybe inadvertently)
this has its limitations as the checking is
insensitive and inappropriate in their
restricted to address and income verification,
communication, causing irreparable harm to
credit history and risk classification. Banks need
their reputation and brand. Take the instance
to look beyond mere KYC compliance and
of a sales representative who mistakenly tries
strengthen their reputation risk management
to sell a credit card to a customer who already
mechanism with KYCB (Know Your Customers’
has one and is struggling to keep up with his
Business) and KYBR (Know Your Customers’
payments. Far from adding value, such an
Business Risk) processes.
action will create a negative impression. Banks
The following examples show how KYCB and therefore need to understand the demographic,
KYBR processes are central to detecting psychographic and other characteristics of their
reputation risk: When a bank signs up a bullion customers and tailor their message accordingly.
trader as a customer, it anticipates large and Technology can play a big role in this.
frequently occurring transactions. While frequent,
high value transactions are typical of legitimate 5C Dimension in Mitigating Reputation Risk
bullion trading, their pattern is very similar to Just as reputation risk can arise from various
money laundering transactions. Unless the bank quarters, ranging from regulatory non-compliance,
closely investigates the customer’s business sub-standard service or irrelevant or poor
credentials, it will never be able to detect if the quality communication, inadequate security
transactions – which look genuine – are actually a infrastructure and shortfall in financial performance
front for illegal activity. to poor crisis management, association with
partners of poor repute, lip service to Corporate
In-depth customer (and customer business)
Social Responsibility and labor unrest, it can
understanding will facilitate awareness of
also leave a multi-dimensional impact on the
interrelated risks between different groups of
organization and its 5 Cs, namely, the consumer,
stakeholders like customers, investors and
capital, compliance, cost and competition.
guarantors, and highlight the possibility of a
Conversely, managed well, these elements can
cascading effect were one of these relationship
also bolster a bank’s reputation.
nodes to come under pressure. Such investigation
assumes great significance especially in trust-
Consumer
based transactions.
For service organizations like banks, which are
Business as Usual built on trust and confidence, instilling these is
a surefire way of managing reputation risk.
Banks must also proactively manage the risk of
Banks can build customer confidence with efficient
reputation loss in the course of operations. Say
service, flexible and customized products and
that on account of an ATM malfunction, a cash
technologically advanced banking channels.
withdrawal is not processed but the customer’s
account is nonetheless debited. In this online Capital
real-time world, reports of such an occurrence
can be tweeted in seconds. This gives the When their risk goes up as a result of operational
opportunity to a rival bank, which is listening in silos or because the mitigating factors are not
on social media, to swoop in and take away identified properly, banks will have to maintain
Needed, A Holistic Approach to Reputation
Risk Management in Banks

4. higher regulatory/ economic capital to avoid Look Beyond Banking
bankruptcy and liquidity crunch. Conversely, by
lowering operational risk, they can free up Traditionally, banks have looked up to the
capital and consequently, reduce the level of reputation risk management standards set by
reputation risk. other institutions within the industry. It is
high time they moved their focus beyond
Compliance banking and looked at the innovative ways in
which businesses like consumer products or
By establishing comprehensive risk identification automobiles – where a large number of customers
and classification processes, in accordance with and counter-parties are involved in the supply
compliance requirements, banks can guard chain and product liability is high – manage
against compliance failure and its negative their reputation.
consequences.
Infuse Belief in Employees
Cost
First, the workforce – from the seller to the teller
The knowledge that their work significantly to the Chief Risk Officer and the Board – must
impacts the organization as a whole motivates be convinced that its talent have a significant
employees to put their best foot forward. bearing on the organization’s fortunes, and can
Employees must also be sensitized to the make or mar the bank’s reputation. Next,
different risks inherent in their daily tasks, employees must be trained to distinguish
and trained in ways to avoid them. Of course, between risky and risk-friendly behavior so that
this comes at a cost, as banks have to spend they are confident about their actions.
considerable sums of money for periodic
training of core staff and building up case Ensure Employee Satisfaction
study repositories for future reference. But it is
money well spent. Banks should realize that employee satisfaction
also impacts reputation. Contented employees
Competition will perform their jobs to the best of their ability,
which will manifest as better service, higher
By losing their reputation, banks play right into quality and an employee-friendly workplace. As
the hands of competitors who will seize the good employers, banks will attract the best
opportunity to cause further damage. On the talent, who will further enhance their quality of
other hand, a strong image or brand is not only service and image.
the best source of competitive differentiation, but
also an intangible asset on the Balance Sheet. Create Knowledge Banks
A Broader Approach to Reputation Risk Today, banks do not have access to knowledge
Management repositories of case studies on how organizations
within and outside the industry have managed
Most banking organizations view risk mitigation reputation risk in the past. They must build such
as a compliance issue, and the domain of information storehouses in order to learn from
the risk management team. Business rarely others’ mistakes and also their best practices.
gives a thought to how its actions can adversely
impact the bank’s risk profile. On their part, Deploy Enterprise-wide Solutions
risk managers practice their craft in an insular
manner, rarely looking beyond the tried and Technology is a key enabler of risk management.
tested, the banking industry and the regulator’s An enterprise-wide risk management solution
rule book. They might benefit from the brings down silos to facilitate integrated risk
following ideas: management and a holistic view of organizational
Needed, A Holistic Approach to Reputation
Risk Management in Banks

5. risks. This permits a deeper understanding of medium in order to keep tabs on public
customers and their risks and allows banks to perception and improve customer engagement,
take precautionary measures well in advance. banks have chosen to stay away. They need to
come to terms with this reality, because as
Use Analytics as a Tool someone famously said “the only way to put out
a social media fire is with social media water.”
A hitherto unexplored area in risk management Failing that, all their efforts to build reputation
is analytics. While this tool is extensively used will come to naught in social networks.
in sales and marketing, banks are yet to
recognize its potential for managing reputation Proactive Management is the Key
risk. Banks have access to massive amounts of
information, or big data, which can be fed into “A key challenge in measuring reputation risk is to
an analytics solution to generate valuable risk first define what it is…”
insights. Technology vendors have their task
cut out, namely to encourage banks to utilize the As mentioned earlier, prevention is the best
power of analytics in this area. way to manage reputation risk. Banks need to
strengthen their early warning system by
Log on to Social Media monitoring reputation consistently and regularly,
anticipating the financial impact of reputation risk
Today, reputations are not built within and proactively managing high risk situations.
organizations, but rather in the online world of
social media, where a single negative comment
can spread like wildfire within hours across Author
the globe. So far, banks have largely been at the
Manish Jain
receiving end of social media ire, no doubt, in
Industry Principal
return for the events of the past four years.
Infosys
Unfortunately, rather than participating in the
Needed, A Holistic Approach to Reputation
Risk Management in Banks