Reputational effects of operational risk events for financial institutions

Micocci, M.;Masala, G. B;Cannas, G.;Flore, G.

2009-01-01

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Abstract

This paper aims at measuring reputational effects for financial institutions by examining a firm’s stock price reaction to the announcement of particular operational loss events such as internal frauds. We conduct at this purpose an event study analysis of the impact of operational loss events on the market values of banks and insurance companies, using the OpVar database (OpData® dataset supplied by OpVantage®). This analysis concerns some publicly reported banking and insurance operational risk events affecting publicly traded US or European institutions from 2000 to 2006 that caused operational losses of at least $20 million – a total of 20 bank and insurance company events. We estimate for these institutions the cumulative abnormal return. It turns out the evidence that stock prices react negatively to announcements of operational losses due to internal frauds. We conclude our analysis by estimating the Reputational Value at Risk at a given confidence level, which represents the economic capital needed to cover reputational losses over a specified holding period.