Reputational risk is the current or prospective indirect risk to earnings and capital, decline in the customer base, costly litigation arising from adverse perception of the image of the banks on the part of its stakeholders. It may originate from the lack of compliance with service standards, failure to deliver on commitments, lack of customer-friendly service and fair market practices, unreasonably high costs, inappropriate business conduct or unfavorable authority opinion and actions.
Several paths by which reputation risk can induce losses for a firm/Bank:
1. Loss of current or future customers, for example increased advertising costs are necessary to restrain reputation damage.
2. Loss of employees or managers within bank, an increase in hiring costs
3. Reduction in current or future business partners
4. Increased costs of financial funding
5. Increased costs due to govt. policy, supervisory regulations fines or penalties.