AIFIRM scientific validation

Reputational Risk for financial institutions: a proposal of quantitative approach

Read the scientific article submitted to double-blind peer review published by Italian Association of Financial Industry Risk Managers (AIFIRM) on Risk Management Magazine vol. 16, issue 2, May - August 2021

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REPUTATIONAL RISK FOR FINANCIAL INSTITUTIONS: THE QUANTITATIVE APPROACH

Leveraging the brand through key business phenomena analysis to understand the meaning of Reputational Risk

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What’s missing nowadays?

Subjectivity, discretion and interpretation that characterize the market standard qualitative model, do not allow for reputational risk measurement in an objective and unbiased way.

Additionally, the current scenario fails to provide Top Management with the necessary information to evaluate the business phenomena correlated with reputational risk components needed for a complete picture.

The Reputational Risk Quantitative Model

The Reputational Risk Quantitative Model (or simply “Q-model”) allows us to meet the need to overcome the reliance on human sensitivity for risk management. Based on real data from the financial institution, it offers the possibility to conduct objective analyses and to group together the trend of dozens of business phenomena, providing a mosaic of how the market perceives the financial institution. The strict link among Q-model components makes the analysis of events affecting the financial institution stability possible.

What does the Q-model offer?

The adoption of the Reputational Risk Q-model leads financial institutions to obtain all the information necessary to steer possible negative situations and promptly intervene with any corrective measures or actions deemed appropriate. This feature provides benefits from both risk management and business points of view and, at the same time, allows you to harvest new opportunities while considering specific risk components. In more detail, through its intrinsic characteristics, the Q-model enables the following aspects:

RISK MEASUREMENT FRAMEWORK EXPANSION

BUSINESS PHENOMENA MONITORING

CROSS - MONITORING

PERSONALIZATION

BUSINESS ADHERENCE

The risk measurement framework introduced by the Q-model is able to integrate and extend the risk analysis offered by the qualitative approach, thanks to measurable elements such as scores and contributions.

The Q-model offers the possibility of monitoring a multiplicity of business phenomena through the Risk Factors underlying the Stakeholders. Business phenomena represent a tool for tracing the nesting points of Reputational Risk in financial institutions.

The business phenomena monitored through the specific Risk Indicators can be cross-analysed to intercept dynamics which, taken collectively, reveal situations on possible global shortcomings in the monitoring processes that need to be implemented.

The Q-model enables you to focus, depending on the chosen level of depth, on the final output, the Reputational Risk Synthetic Index, and on the contributions of the quantitative drivers, the Stakeholders, whose trends can be analysed through the underlying Risk Factors and Risk Indicators.

The Q-model is fit for any company based on its peculiarities and specific needs, providing an all-round analysis: from the big picture, to the study of global trends, to specific monitoring, to the impact of business phenomena, to cross analysis, all the way to the identification and dissection of individual risk contributions.

How can we assist you?

Avantage Reply is able to design a fully customized reputational risk management model based on the financial institution needs.

By analysing the business structure of the institution, it is possible to tailor the model so as to guarantee precise and constant monitoring of any or all of the phenomena of interest.