The value of reputational capital and risk in banking and finance

This survey paper considers the ‘special’ nature of financial services and traces the roots of the reputational risk that firms in the industry invariably encounter. It defines what reputational risk is and outlines the types of reputational risk facing financial services firms. It considers the key sources of reputational risk in the presence of transactions costs and imperfect information, and reviews available empirical research on the impact of reputational losses imposed on financial intermediaries, including the separation of reputational losses from accounting losses. The paper concludes by focusing on managerial requisites for dealing with reputational risk issues, notably from a corporate governance perspective.