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7.3.3 Reputation

Reputation is a decisive asset in securing future-viable profitability (Pohl and Zaby 2008, p. 4). Reputation is a potential core competence of a bank. When customers first contact a bank, they cannot yet judge its services, or at least not without high information costs. The reputation that the bank has previously earned on the market from existing customers, and which causes those customers to recommend “their” bank, can therefore be a decisive factor for new customers when selecting a certain bank. Reputation is therefore important when the quality of a service cannot be completely observed.

Reputation is defined as the public standing resulting from the perceptions of stakeholders with regard to competence, integrity and trustworthiness (Schierenbeck et al. 2004). It is composed of the sum of the perceptions of all stakeholders affected by the actions of the bank (Pohl and Zaby 2008, p. 7) and can, in this context, be understood as the esteem held by other persons—and thus, implicitly, the trust in the quality of a bank. Banks can improve their strategic competitive position by acquiring a reputation—verbally or virtually—, as it helps to bind existing customers, for example, and address new ones (Tomczak and Rudolf-Sipotz 2006).[1] The reputation of a bank can also play a role in recruiting qualified employees.

Whereas reputation was once built up within narrow local limits via word of mouth, this now takes place worldwide online. Due to the anonymity of the market participants there is a greater risk than in real markets that poor-quality products are delivered, for example, or even that the seller provides no service at all. Therefore, company reputation has an even greater significance than in physical markets. Classic examples include PowerSellers on eBay, who frequently have thousands of ratings and thus recommendations from customers (Dellarocas 2002).

An unchanged or improved reputation usually has no effect on existing customers. A decline in reputation, on the other hand, is likely to have an impact not only on potential new customers, but can also become noticeable in terms of the desertion of existing customers, even though these may not be directly affected by the reputation-damaging activities of the bank. Examples include the LIBOR manipulations and the foreign exchange speculations by the major banks, which are currently under investigation.[2]

With a view to capital lenders we can assume that a loss of reputation can lead to greater expectations with regard to risk premiums and thus to higher capital costs.

When applied to employees, a loss of reputation can lead to a loss in employees or difficulties in acquiring qualified staff.

The formation of the reputation of a bank depends on the actions of individual employees. The problem in this context is that staff are employed in a company for a limited time only. They might have an incentive to refrain from building up a reputation or even to destroy it towards the end of their working life or when switching employer (if past behavioural information is not transparent), as the accompanying negative consequences will no longer affect them personally.

In this context, the entire incentive structure—for example bonus discussions— should be considered for the entire bank management. The incentive with annual bonuses is to downplay long-term corporate goals when making strategic decisions.[3] In a digital world with split-second, worldwide access to information, the danger for banks is that an error as perceived by the customer becomes public immediately and reputation is destroyed.[4] The significance of the reputation of a company is reflected increasingly in the risk management of banks.[5] The topic of reputation risk management is being observed more and more in the context of the risk management of banks, although this type of risk is not (yet) subject to regulatory requirements.[6]

  • [1] Recommendations play a prominent part in credence goods such as doctor relationships or bank relationships.
  • [2] However, no studies exist on this matter as yet.
  • [3] Suggestions to measure bonuses for bank employees on the performance of their bank over a 10-year period should also be seen in this context (Welt 2013).
  • [4] This does not only apply to banks, however, but also to bank customers. Business customers in particular, who repeatedly require financing, have their own incentive, under certain circumstances (growing reputation leads to decreasing loan interest), not to invest the loans given to them in investment projects that are too risky (Diamond 1989).
  • [5] “Morale is a production factor,” the chief communication officer of Deutsche Bank is quoted as saying (Bankrecht und Bankpraxis 2013).
  • [6] On the current status of reputation risk management in Swiss banks, see the study by the SIF “Reputationsrisikomanagement bei Schweizer Banken” (Auge-Dickhut et al. 2013).
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