Calculating Entrepreneurial Reputation Risk in Financial Institutions

Entrepreneurial reputational risk is one of the most significant risks affecting the profitability and success of commercial banks. A bank’s reputation is one of its main assets, and financial institutions have to manage themselves in such a way as to keep it safe. Once a bank’s reputation is damaged, the downward trajectory may be rapid and irreversible, including both a direct and an indirect impact on the organization’s income, profit, and financial strength. Analysis of entrepreneurial reputational risk is a relatively new research endeavor. The current literature addresses the need to manage reputational risk and identifies explanatory factors, but the factors tend to be difficult to estimate and are usually not associated with any action plan. This paper attempts to address this issue by providing a mathematical analysis of the probability and effect of a number of entrepreneurial reputational risk factors. Specifically, we develop a methodology for calculating reputation risk in terms of a bank’s risk assets, and we suggest a way of integrating this metric into the calculation of the capital adequacy ratio.