Modeling Operational Risk Incorporating Reputation Risk: An Integrated Analysis for Financial Firms

36 Pages Posted: 29 Jan 2015 Last revised: 14 Aug 2015

See all articles by Christian Eckert

Christian Eckert

Friedrich-Alexander University Erlangen-Nürnberg

Nadine Gatzert

Friedrich-Alexander University Erlangen-Nürnberg

Date Written: August 13, 2015

Abstract

It has been shown in the empirical literature that operational losses of financial firms can cause severe reputational losses, which, however, are typically not taken into account when modeling and assessing operational risk. The aim of this paper is to fill this gap by assessing the consequences of operational risk for a financial firm including reputational losses. Toward this end, we extend current operational risk models by incorporating reputation losses. We propose three different models for reputation risk: a simple deterministic approach, a stochastic model using distributional assumptions, and by taking into account a firm’s ability to deal with reputation events. Our results emphasize that reputational losses can by far exceed the original operational loss and that neglecting reputational losses may lead to a severe underestimation of certain operational risk types and especially fraud events.

Keywords: Operational risk, reputation risk, Solvency II, Basel III, loss distribution approach, Value at Risk

JEL Classification: G20, G21, G22, G32

Suggested Citation

Eckert, Christian and Gatzert, Nadine, Modeling Operational Risk Incorporating Reputation Risk: An Integrated Analysis for Financial Firms (August 13, 2015). Available at SSRN: https://ssrn.com/abstract=2557270 or http://dx.doi.org/10.2139/ssrn.2557270

Christian Eckert

Friedrich-Alexander University Erlangen-Nürnberg ( email )

Lange Gasse 20
Nuremberg, 90403
Germany
+499115302886 (Phone)
+495302888 (Fax)

HOME PAGE: http://www.vwrm.rw.fau.de/

Nadine Gatzert (Contact Author)

Friedrich-Alexander University Erlangen-Nürnberg ( email )

Lange Gasse 20
Nuremberg, 90403
Germany
+499115302884 (Phone)
+499115302888 (Fax)

HOME PAGE: http://www.vwrm.rw.fau.de

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