Wednesday, June 18, 2008

Reputation management = risk management

The Financial Times today reports that in the rarified air of private banking reputation management has become as important as risk management. It's a valid point, particularly at a time when the world and well-heeled clients are focused on risk. The story goes on to point out that the biggest problems come when clients incur losses on products that they do not understand. "The problem is more losses or products that have been sold to private clients that, actually, the clients have not understood." While I don't think we are going to see product suitability issues on a grand scale (like subprime mortgages) at the high end of the market, banks need to carefully review their sales and risk disclosure practices.

Crises of confidence are difficult to contain in the banking industry. Even typically "sticky" money, like retail deposits and assets at private banks can quickly become unglued. Banks need to re-audit their products and practices to safeguard against operational issues that escalate into reputation damaging events. A lot can be learned from the experience of E*Trade, which lost $2bn in assets in just one day. Fortune chronicles the de facto run on the bank and it is interesting to look back and see the interrelation between risk management, operations and reputation management.

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