RR-1 RR-1 Reputational Risk
RR-1.1 RR-1.1 Introduction and Scope
RR-1.1.1
This Chapter provides CBB's requirements and guidance with respect to an effective reputational risk management and sets out the approach for
Islamic bank licensees to manage reputational risk.July 2018RR-1.1.2
Reputational risk can be defined as the risk arising from negative perception on the part of customers, counterparties, shareholders, investors, debt-holders, market analysts, other relevant parties or regulators that can adversely affect a bank's ability to maintain existing, or establish new, business relationships and continued access to sources of funding (e.g. through the interbank or securitisation markets). Reputational risk is multidimensional and reflects the perception of other market participants. Furthermore, it exists throughout the organisation and exposure to reputational risk is essentially a function of the adequacy of the bank's internal risk management processes, as well as the manner and efficiency with which management responds to external influences on bank-related transactions.
July 2018RR-1.1.3
Reputational risk also may affect a bank's liabilities, since market confidence and a bank's ability to fund its business are closely related to its reputation. For instance, to avoid damaging its reputation, a bank may call its liabilities even though this might negatively affect its liquidity profile. This is particularly true for liabilities that are components of regulatory capital, such as hybrid/subordinated debt. In such cases, a bank's capital position is likely to suffer.
July 2018RR-1.1.4
Once a bank identifies potential exposures arising from reputational concerns, it should measure the amount of support it might have to provide (including implicit support of securitisations) or losses it might experience under adverse market conditions. In particular, in order to avoid reputational damages and to maintain market confidence, a bank should develop methodologies to measure as precisely as possible the effect of reputational risk in terms of other risk types (e.g. credit, liquidity, market or operational risk) to which it may be exposed. This could be accomplished by including reputational risk scenarios in regular stress tests. For instance, non-contractual off-balance sheet exposures could be included in the stress tests to determine the effect on a bank's credit, market and liquidity risk profiles. Methodologies also could include comparing the actual amount of exposure carried on the balance sheet versus the maximum exposure amount held off-balance sheet, that is, the potential amount to which the bank could be exposed.
July 2018RR-1.1.5
An
Islamic bank licensee should pay particular attention to the effects of reputational risk on its overall liquidity position, taking into account both possible increases in the asset side of the balance sheet and possible restrictions on funding, should the loss of reputation result in various counterparties' loss of confidence. (See Liquidity Risk Management Module.)July 2018RR-1.1.6
Islamic bank licensees must establish an effective process for managing reputational risk that is appropriate for the size and complexity of their operations.July 2018RR-1.1.7
This Module focuses mainly on:
(a) The approach to identifying and managing reputational risk;(b) Drawing attention to various sources of reputational risk;(c) Providing guidance on the key elements of reputational risk management; and(d) Promoting adoption of a formalized and structured approach to managing reputational risk.July 2018