• Operational risk and reputation in financial institutions: Does media tone make a difference?

      Barakat, Ahmed; Ashby, Simon; Fenn, Paul; Bryce, Cormac (Journal of Banking & Finance, 2019)
      Operational risk announcements are unexpected adverse media news that potentially harm the reputation of financial institutions. This paper examines the equity-based and debt-based reputational effects of financial sentiment tones in operational risk announcements and shows how such reputational effects are moderated by alternative sources of public information. Our analysis reveals that the net negative tone and litigious tone have adverse reputational effects, and the uncertainty tone mitigates the adverse reputational impact. Additionally, alternative, simultaneous sources of information neutralize the reputational effects of textual tones. First, third-party information about the event (i.e. regulatory announcements and final settlements) dissolves the favorable (adverse) reputational impact of the uncertainty tone (litigious tone). Second, loss amount disclosure and firm recognition substitute the reputational effects of the net negative tone and uncertainty tone only in Anglo-Saxon countries and market-based economies. Overall, our findings indicate that the reputational effects of the media materialize most when there is lack of certain, quantifiable and regulated public information about the operational risk event.
    • The reputational effects of analysts' stock recommendations and credit ratings: Evidence from operational risk announcements in the financial industry

      Barakat, Ahmed; Ashby, Simon; Fenn, Paul (International Review of Financial Analysis, 2018)
      This paper investigates whether more favorable stock recommendations and higher credit ratings serve as a reputational asset or reputational liability around reputation-damaging events. Analyzing the reputational effects of operational risk announcements incurred by financial institutions, we find that firms with a “Buy” stock recommendation or “Speculative Grade” credit rating are more likely to incur an equity-based reputational damage. In addition, firms with lower credit ratings incur a much more severe debt-based reputational damage. Moreover, credit ratings are more instrumental in mitigating the debt-based reputational damage caused by fraud incidents or incurred in non-banking activities. Furthermore, the misconduct of senior management could demolish the reputation of firms with less heterogeneous stock recommendations. Finally, credit ratings serve as an equity-based reputational asset in the short term but turn into an equity-based reputational liability in the long term. Overall, our analysis reveals that stock recommendations represent a reputational burden and credit ratings act as a reputational shield; however, the persistence and magnitude of such reputational effects are moderated by time and event characteristics.
    • Waking the sleeping giant: Maximising the potential of operational risk management for banks

      Ashby, Simon; Clark, David; Thirlwell, John (Journal of Financial Transformation, 2011)
      Within the banking sector operational risk is often perceived to be a less important risk than financial risks such as market or credit risk. Such a view is typically reinforced by the observation that banks are in the business of taking these financial risks and must lend large amounts of money and/or take significant market positions if they are to make an acceptable profit for their owners. Events such as the global financial crisis would also seem to reinforce this view of the pre-eminence of financial risks. Taken at face value the crisis might appear to have been caused by a combination of excessive lending, leverage and derivatives trading - activities which fall with the realm of financial risk. Yet deeper investigations into the crisis have revealed that other more complex forces were at work, forces, such as failures in people, process and systems which have more in common with the field of operational risk. In this paper we argue that banks must do more to wake the sleeping giant of operational risk management in their activities. We demonstrate how operational risk related failures in people, processes and systems lay at the heart of the global financial crisis, leading to disastrous consequences not only for individual banks, but also for the financial sector as a whole and the domestic economies that are supported by it. We also highlight three key barriers that we believe are preventing the discipline of operational risk management from reaching its full potential in the banking sector. Finally we identify a number of themes that we believe should be embraced by banks and their regulators to help overcome the three barriers and enhance the management of operational risk across the sector.