What is Reputation Risk?
Reputation risk is the danger that a firm will suffer a loss in public perception (or consumer acceptance) due to either:
- a loss of confidence in the firm’s financial soundness
- a perception of a lack of fair dealing with stakeholders
Reputation risk is often one of the outcomes of experiencing a loss in another risk category.
Example of Reputation Risk
For example, a significant credit risk experienced by a bank could create a reputational impact for the firm. Likewise, the exponential growth in technology (and the internet) could lead to operational risks such as a cyberattack.
Why is it essential to know Reputation Risk?
Reputational risk is one of the most dynamic risks stemming from any other risk. A liquidity crisis in the Bank may also lead to reputational risk. An institution’s reputation is difficult to gain back if there is a major infamous incident regarding the reputation.