Reputational Risk and Conflicts of Interest in Banking and Finance: The Evidence So Far

This paper attempts to define reputational risk in financial intermediation and to identify the proximate sources of reputational risk facing financial services firms. It then considers the key drivers of reputational risk in the presence of transactions costs and imperfect information in financial markets, surveys empirical research in the literatre on the impact of reputational losses imposed on financial intermediaries and presents some new empirical findings. The paper then develops the link between reputational risk and exploitation of conflicts of interest in financial intermediation, arguably one of the most imporatant threats to the reputational capital of financial firms. Finally, it considers some managerial requisites for dealing with both reputational risk and conflicts of interest.