Reputational Risk: A Short Introduction

David Shirreff

Loss of reputation can kill a bank. It may not happen overnight, but, unless prompt and comprehensive action is taken, the damage takes hold and is soon irreversible. Let us look at two examples from ancient history.

NatWest Markets was the investment-banking arm of NatWest (now part of the Royal Bank of Scotland – RBS). In 1997 the investment bankers suffered severe losses in long-term interest-rate derivatives because of poor risk management. The way the news came out, and the poor response of senior managers to a clear loss of reputation, resulted in the closure of the investment bank, and, within three years, the sale of NatWest to RBS.

Union Bank of Switzerland (not to be confused with today’s UBS) prided itself on being one of the top global investment banks. Also in 1997, it misjudged the risk on long-term equity derivatives and ran up losses of around US$1 billion. The entire risk-management culture of the firm was below standard and failed to adjust sufficiently and convincingly following the loss. Within months the bank was taken over by its smaller rival, Swiss Bank Corporation. The merged bank was renamed UBS.

These are extreme cases. Usually banks that take a hit to