A structural equation model of reputational risk in South Africa

Abstract

The central function of a bank inherently exposes it to various financial risks where each of these risks has the possibility to influence stakeholders’ perception. This perception, which is linked to the trustworthiness, credibility and performance of the bank, translates into the reputation of the bank. Depositors can be regarded as the main stakeholders of a bank and hence their behaviour can influence the reputational risk of the bank. With very limited research on reputational risk and depositor behaviour within the South African banking sector, the main purposes of this paper was to provide a meaningful contribution toward literature and empirical analysis. Primary data was collected from 417 depositors in Gauteng, South Africa, using a self-structured questionnaire. Statistical techniques such as correlation and structural equation modelling were used in the statistical analysis. The SEM identified three variables that uniquely influences reputational risk in banks. Operational risk events, behavioural finance biases and depositors level of risk tolerance were found to influence reputational risk. These empirical findings will help banks to profile depositor behaviour during operational risk events in order to mitigate against large losses and possible bank runs. The structural model will enable banks to forecast the factors that will influence a banks reputation i.e. a banks most valuable intangible asset. This will, in turn, enable banks to come up with better mitigation and management strategies for reputational risk.