The Ministry of Education and Science of the Russian Federation

Plekhanov Russian Academy of Economics

Chair of Foreign Languages

Project

“RISK MANAGEMENT IN BANKING”

(Reputational risk and its case studies)

Performed by

Ganbat Khaliun

Finance Faculty

Group 2509

Supervised by

Kovaleva E.B

Project defended on:

________________2013__

Evaluation:

______________________

Tutor’s signature:

______________________

Moscow 2013

Content

Introduction……………………………………………………………………………………………………….……2

Chapter 1. General theory………………………………………………………………………………….……4

1. Risk management: definition, history and its role in banking………………………4

2. Types of risks in banking……………………………………………………………………………5

• Credit risk………………………………………………………………………………….……5

• Market risk………………………………………………………………………………..……6

• Operational risk………………………………………………………………………………6

• Reputational risk……………………………………………………………...……….……7

3. Reputational risk as one of the main risks………………………………….………………7

Chapter 2. Reputational risk cases………………………………………………………………..………11

Conclusion……………………………………………………………………………………………………………16

Bibliography…………………………………………………………………………………………………………17

Appendices………………………………………………………………………………………………….………18

Glossary…………………………………………………………………………………………………….…………19

Introduction

Taking risk is an integral part of the banking business, it is not surprising that banks have been practicing risk management ever since there have been banks - the industry could not have survived without it. The only real change is the degree of sophistication now required to reflect the more complex and fast-paced environment. Even today, however, some simple rules continue to be critical to risk management. By the simple act of separating front-office from back-office responsibilities, Barings could well have prevented the enormous losses that led to its failure.

Recent financial disasters in financial and non-financial firms and in governmental agencies point up the need for various forms of risk management. Financial misadventures are hardly a new phenomenon, but the rapidity with which economic entities can get into trouble is.

Banks and similar financial institutions need to meet forthcoming regulatory requirements for risk measurement and capital. However, it is a serious error to think that meeting regulatory requirements is the sole or even the most important reason for establishing a sound, scientific risk management system. Managers need reliable risk measures to direct capital to activities with the best risk/reward ratios.

Risk management is the process by which managers identify key risks, obtaining consistent, understandable, operational risk measures, choosing which risks reduce and which to increase and by what means and establishing procedures to monitor the resulting risk position.

Moreover, there are 4 major sources of value loss: market risk, credit risk, operational and reputational risks. As one of the main risks I chose reputational risk, to study more and in my work I also brought examples of reputational risks that caused an enormous loss for the banks.

Assessing reputational risk is not an objective process, but rather it is a subjective assessment that could reflect a number of different factors. "Reputational risk is the starting point of all risks, if you have no reputation, you have no business." Its major stakeholders can interpret reputation as a market or public perception of management and the financial stability of an institution. Stakeholders can include its customers, shareholders, and the board of directors. The media could also have a perception, either good or bad, of an organization.

Reputation is and could be perceived as an intangible asset, synonymous with goodwill, but it is more difficult to measure and quantify. Consistently strong earnings, a trustworthy board of directors and senior management, loyal and content branch employees, and a strong customer base are just a few examples of positive factors that contribute to a bank's good reputation.

The rewards can be great for an institution that has an excellent reputation. Establishing a strong reputation provides a competitive advantage over an organization's counterparts. A good reputation strengthens a company's market position and increases shareholder value. It can even help attract top talent and assist in employee retention. In short, reputation is a prized asset, but it is one of the most difficult to protect.

My paper consists of 2 parts, which are theory and cases, connected with reputational risk. The main target is to study risk management, in particular, reputational risk, which role is becoming more and more significant in banks future.