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  • RR-3.2 RR-3.2 Assessment of Reputational Risk

    • RR-3.2.1

      Islamic bank licensees must conduct a regular assessment of the reputational risk to which they are exposed, leveraging their understanding of governance, business model, products and the environment in which they operate.

      July 2018

    • RR-3.2.2

      Islamic bank licensees must consider both internal and external factors or events that might give rise to reputational concerns (refer to Section RR-2.1). Banks must consider the following qualitative indicators, amongst others, in their assessment of reputational risk:

      (a) The number of sanctions from official bodies during the year;
      (b) Media campaigns and consumer-association initiatives that contribute to a deterioration in the public perception and reputation of the institution;
      (c) The number of and changes in customer complaints;
      (d) Malpractices and irregularities;
      (e) Negative events affecting the institution's peers;
      (f) Dealing with sectors that are not well perceived by the public (e.g. weapons industry, embargoed countries etc.) or people and countries on sanctions lists; and
      (g) Other 'market' indicators, for example, rating downgrades or changes in the share price throughout the year.
      July 2018

    • RR-3.2.3

      Islamic bank licensees must assess the significance of its reputational risk and how it is connected with other risks (i.e. credit, market, operational, liquidity and profit rate risks) by leveraging other risk assessments to identify any possible secondary effects in either direction (from reputation to other risks and vice versa).

      July 2018

    • Stress Testing

      • RR-3.2.4

        Islamic bank licensees must enhance their stress testing methodologies to capture the effect of reputational risk. Banks must also conduct stress testing or scenario analysis to assess any secondary effects of reputational risk (e.g. liquidity, funding costs, etc.).

        July 2018

      • RR-3.2.5

        The stress testing technique is useful for identifying events or changes that pose threats to banks, and can help develop different sets of circumstances which could potentially cause a crisis. Banks can make use of this technique to assess the likelihood of the risk materialising and the potential impact of the risk on their business and reputation under different stress scenarios (refer to Module ST on Stress Testing for guidance).

        July 2018

      • RR-3.2.6

        Islamic bank licensees should be guided by the following supplementary guidance on use of stress testing for reputational risk:

        (a) Banks employing stress testing techniques for assessing reputational risk should seek to incorporate stress scenarios for reputational risk into their institution-wide stress testing procedures and assess the impact of reputational risk on other major risks (e.g. business or liquidity risk);
        (b) In developing stress scenarios for reputational risk, banks should identify the major sources of reputational risk to which they are potentially exposed, key stakeholders that will most likely increase reputational risks in stress scenarios or an appropriate range of circumstances and events. Banks should also consider how those sources, circumstances and events may adversely affect their business prospects and financial position (including earnings, capital and liquidity), as well as generate other second round effects;
        (c) Banks may face reputational risk in other aspects, such as those arising from material weaknesses in their internal risk management processes (e.g. resulting in substantial fraudulent losses) or management's failure to respond swiftly and effectively to external threats or influences (e.g. resulting in poor strategic decisions). Banks should exercise their best judgment and apply stress scenarios and parameters that suit their own circumstances and risk profile;
        (d) Once the potential exposures arising from reputational concerns are identified, banks should estimate the amount of support (capital or liquidity) they may have to provide, as well as estimate potential loss under adverse market conditions. Banks should also assess the impact of reputational risk on other risks to which they may be exposed. This could be accomplished by including reputational risk scenarios in regular stress tests;
        (e) Banks should assess whether there is any longer term impact on their business and operations due to reputational risk (e.g. loss of market share, customer base or business revenue). Banks should also pay particular attention to the effects of reputational risk on their overall liquidity position, taking into account both possible changes in the asset side of the balance sheet and possible restrictions on funding, should the damage in reputation result in a general loss of confidence on the part of their counterparties and customers; and
        (f) Senior management should actively participate in conducting stress testing and scenario analyses for reputational risk (including the development of stress scenarios and assumptions), and review the stress testing results.
        July 2018