Central bank sets rules for lenders’ management of reputational risks

THE CENTRAL BANK on Tuesday released guidelines for managing reputational risk to strengthen financial institutions’ guard against events that could impact their financial standing and affect stakeholder confidence.

Circular No. 1114 signed by Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno on April 16 sets rules for both banks and nonbank financial institutions, assigning responsibilities to officials and employees in monitoring reputational risks.

The guidelines define reputational risk as those that could affect earnings, capital and liquidity due to negative perception on the financial institution and adversely impact their business relationships and hinder new venture establishments or continuous access for funding

These risks could be caused by customers, shareholders, investors, employees, market analysts, the media, and other stakeholders, including regulators and government agencies.

“A BSP-supervised financial institution is expected to adopt a reputational risk management framework that is commensurate to its size, nature and complexity of operations, overall risk profile, and systemic importance,” the circular said.

The central bank said financial institutions that are part of a group or a conglomerate are prone to getting affected by reputation events involving their parent firms or other members of the conglomerate.

It also stressed that timeliness of response and crisis preparedness could determine the magnitude of the impact of reputational risks.

“Poor or delayed response to a crisis can increase reputational damage than the event itself, and possibly lead to a liquidity crisis/ and or major disruptions to operations,” the BSP said.

“Meanwhile, effective and timely crisis management arrangements, including stakeholders and media communications, could quickly allay stakeholder fears, regain their trust, and even enhance reputation,” it added.