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ICAAP Key Risks: Reputation Risk

What is Reputational Risk?

What should be considered when assessing reputational risks and how can reputation risk be defined?

Reputation Risk

Reputation Risk refers to the risk of loss that results from damages to the firm’s name or reputation as a result of an event that may or may not be the firm’s fault.

Business Reputation

The reputation of a firm and their business is established over time – sometimes this may take a relatively short time but more often a good reputation is established over a much longer period of time. Having a good reputation is about gaining and retaining the confidence and trust of not only the customers of the business, but also the stakeholders and shareholders in the business as well as employees and suppliers.

Whilst building a good reputation can be hard, confidence in the firm can quickly be lost due to any event or scandal that paints the firm in a bad or compromised light. The result of this loss of confidence and damage to a firm’s reputation can quickly lead to decline and has been seen to happen often in the Financial Services Industry.

Reputational Risk  & Consequences of Reputational Damage

Reputational risk may result from either direct or indirect actions by the company or those associated with it such as their employees, suppliers or partners. The consequences of reputational damage may result in lost revenue, diminished shareholder value, or increased capital, regulatory or operational costs for example, however these are just some of the financial-based aspects that may arise as a result.

Other adverse events typically related with reputation risk are those of ethics, sustainability, safety, innovation and quality.

Firms should not underestimate the cost of damage to their good name and reputation and thus they should ensure that reputation risk is addressed when evaluating their Internal Capital Adequacy Assessment Process (ICAAP). Thus the assessment and analysis of any adverse impact on a firm’s reputation should be outlined and explained within the firm’s ICAAP Document/ICAAP Report.

Firms should take measures to help avoid reputational risk by ensuring they have established good governance practices and transparency within their business and that their businesses are both socially and environmentally responsible

However, as mentioned a firm remains open to suffering from the adverse consequences of an event or action whether the company is at fault or not.

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