Your CU Times June 25 article, “Matz Discounts Reputation Risk,” notes that of the various risk areas NCUA examiners evaluate, some–including reputation risk–are difficult to quantify.
But consider the quantifiable aftershock of a damaged reputation: run on deposits, lost members, staff turnover, canceled vendor contracts and declining net income, to name a few. Then add the cost of having negative stories repeated anytime the institution’s name pops up in the media.
Reputation risk can and should be measured. This was underscored by the Federal Reserve Board, which noted that reputational risk is the potential for negative publicity to seriously damage an institution’s standing in the eyes of investors and depositors.
The Fed argues reputation is largely based on a firm’s stock price reaction to a major operational or financial loss. Credit unions can’t sell stock, but they do rely on membership shares, their only means of raising capital. In a very tangible way, it’s easy to conclude that, for financial cooperatives, success is only as good as one’s reputation with members.
Many assume manufacturing is the most likely business area to produce a crisis. But the truth is that banking tops the list, with more major reputation crises than any other industry in the past 25 years. Hard to measure? The 2012 LIBOR scandal cost Barclays Bank $450 million and forced out top management. If not bad enough, Barclays then paid out big bonuses after profits fell 30%. Some analysts say the bank may never recover its good name.
Then there’s JP Morgan. Once America’s best-run bank, the “London Whale” scandal took nearly $6 billion in a day, with investors pushing to unseat Chairman Jamie Dimon. He survived and JP Morgan is still strong, but how many more PR hits can it take? Don’t forget the Big 5 settlement over mortgage servicing and foreclosure abuses.
The first thing we tell new clients is to create a PR crisis plan alongside their business continuity plans. Financial institutions are especially vulnerable to reputation risk because consumers trust them with their money. Even minor image problems can damage member confidence.
Warren Buffett said it best: “It takes 20 years to build a reputation and five minutes to ruin it.” For credit unions, reputation risk is too important to overlook.
Margaret J. Blankers
MJB Public Relations Group