OpRisk North America: Reputational risk impossible to quantify, conference hears

Defining reputational risk still a challenge for risk managers, panel says

Reputational risk is almost impossible to quantify, delegates at the Op Risk North America conference in New York heard on Wednesday. In a panel debate on operational risk in an enterprise risk management framework, panellists discussed the difficulties of defining reputational risk.

Spyro Karetsos, director of enterprise risk management at investment management firm Vanguard and former co-head of the operational risk and analysis department at Goldman Sachs in New York, told the conference about the difficulties associated with quantifying reputational risk.

"The international capital adequacy assessment process under Basel II, interestingly enough, has a component on difficult-to-qualify risks – it is where they lump the reputational and the strategic risk category when looking for some kind of way to quantify that exposure. I always laugh at that because I say if that is difficult to quantify, what is operational risk? I think operational risk is difficult to quantify; I think this stuff is almost impossible to quantify."

Eva Leighton, head of operational risk management at Morgan Stanley, said she was surprised at the way the Basel accords exclude reputational risk. "There is definitely an impact [operationally] even though Basel says reputational risk is not an operational risk. I always scratch my head on that one. When you are evaluating the kind of risk somebody is contemplating taking, you are always thinking about the reputational impact."

Karetsos also told delegates that reputational impact could arise as a consequence of any of the risk categories, not only operational risk. This meant organisations needed to consider reputational risk when valuing all their risk categories and consider what the financial – and regulatory – impact could be. He warned the conference that reputational risk can occur even without any failures in any of the risk categories.

"There could be slander, there could be a social media campaign; so whether it is merited or not, reputation these days can drive down market share and can cause there to be an outflow of cash. So we are very mindful of the reputational exposure [we face] and as such in all our risks one of the things we evaluate is the degree that it could impact our reputation. And when we think about mitigation, it is actually sometimes the reputational component that is the bigger driver for how we prioritise resources than it is the financial component, believe it or not."

 

OpRisk North America 2013 was a huge success, bringing in record numbers of senior op risk practitioners and high-level speakers. And we are doing it all again in London on June 11-14! For more information and details about attendance visit opriskeurope.com