Reputational risk: depositor behaviour 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 primary stakeholders of a bank and hence their behaviour can influence the banks’ reputation. A banks’ reputation represents the intrinsic current value of a bank and its ability to create or erode future value. Reputational risk dominates the South African financial market as well the banking industry. Some banks regard reputational risk a result of pure reputational events while the rest of the banks regard it as a consequence of operational risk events. Although the financial markets reaction to operational risk events have been researched widely, very few researchers have explored its influence on reputational risk. The primary objective of this study was to model depositor behaviour during operational risk events to model reputational risk in banks. This study was conducted to provide a meaningful contribution toward literature and empirical research in the field of risk management. This study made use of a quantitative research methodology following a positivist research paradigm. The target population for the study comprised of all South African bank depositors in Gauteng. The sample frame included depositors banking at any one of the 28 registered banks in South Africa, Gauteng. Due to the extensive number of small, medium and large banks registered in South Africa, a decision was undertaken to only use only Gauteng depositors from the top five banks as these represents most of the population. The top five banks in terms of market share (largest customer data base) include: Standard Bank, Absa Bank, First National Bank, Nedbank and Capitec Bank. The sample further consisted out of the following characteristics: older than 18 years; bank depositor for more than five years; earns a monthly salary that is deposited into a bank account; and lives in Gauteng. During this research endeavour, various statistical analysis such as EFA, CFA and SEM was utilised in order to create a model to identify reputational risk after operational risk events specifically in Gauteng, South Africa. Based on the context of reputational risk within this study, a reputational risk definition was created in order to support the empirical objectives. The results from the empirical objectives found that all eight hypothetical operational events (internal fraud, external fraud, employee practices, damage to physical assets, client practises, business disruptions, execution and delivery and pure reputational events) were found to be reliable factors and indicated a significant influence on the reputational risk of a bank. Results from this study indicated that depositors’ behaviour is not influenced by their demographical factors. A positive relationship was found between how depositors form their perception of a bank and their willingness to withdraw during operational risk events. Depositors seem to react to operational risk events irrespective of the type of information source that made the information known. A negative relationship between depositors’ likelihood to withdraw and their risk tolerance level was also found. This indicates that depositors are more likely to withdraw their money from a bank if they are risk adverse. Reputational risk is significantly influenced by operational events, depositors who are subject towards the availability and regret bias, and depositors individual risk tolerance level. The empirical findings of this study will help banks to profile depositor behaviour during operational risk events in order to mitigate against large losses and possible bank runs. The SEM will enable banks to forecast the factors that will influence a banks reputation, which is a banks most valuable intangible asset. This will in turn enable banks to come up with better mitigation and management strategies for reputational risk. By minimising the exposure to reputational risk, banks will be able to take competitive advantage of the opportunities that the ambitious banking industry offers. Considering the theoretical and empirical findings of this study, a few managerial implications and recommendations can be offered. Much like any research endeavour, this research study had limitations of its own. Building on the foundation of this study, future researchers are recommended to use a bigger sample size and extend the region of the sample (to not only use Gauteng but also the other provinces). Since it was found that individuals do not always apply their minds when answering a questionnaire, it is also recommended that the level of financial knowledge of depositors should be investigated. The scope of the study can also be expanded to see whether a relationship between reputational risk and brand loyalty and trust exist in the banking sector.