Reputation risk management in financial firms: protecting (some) small investors

2014 ◽  
Vol 22 (4) ◽  
pp. 286-299 ◽  
Author(s):  
Rasheed Saleuddin
Keyword(s):  
Risk Management ◽  
Self Regulation ◽  
State Intervention ◽  
Financial Industry ◽  
Content Type ◽  
Financial Firms ◽  
Financial Products ◽  
Reputation Risk ◽  
Retail Investors ◽  
Small Investors

Purpose – This paper aims to provide an explanation and evidence for the recent lack of retail financial product failures in Canada in the face of a (formal) regulatory failure. Design/methodology/approach – The paper applies the literature on self-regulation and reputational risk management to a detailed investigation of the marketing of financial products to Canadian retail investors. Internal approval processes for many different players in the retail financial industry were analyzed in detail primarily using interviews. Findings – The author was able to identify associations between structures and policies at financial firms and outcomes for retail investors. Knowing that prevention is more effective than mitigation, marketers of financial products would generally welcome increased state intervention in terms of more and better information disclosures. Research limitations/implications – The research contributes to our understanding of self-regulation in financial markets, specifically addressing what firm characteristics may be related to positive and negative outcomes for small investors in complex structured financial products. Practical implications – Regulators may be able to imply the research findings in selectively allocating scarce resources to policing firms that may be more inclined to participate in riskier behavior. Financial firms may be able to influence the decisions relating to how regulations are designed and implemented and which products are sold to which clients to minimize reputation risk. Originality/value – This is the first time, to the author's knowledge, that the reputation risk management channel has been analyzed in terms of influencing outcomes for retail (small) investors.

Could perverse incentives encourage financial services compliance and internal audit staff to ignore or engage in illegal behaviour?

2018 ◽  
Vol 33 (1) ◽  
pp. 64-89 ◽  
Author(s):  
Bryane Michael ◽  
Mark Williams
Keyword(s):  
Financial Services ◽  
Internal Audit ◽  
Economic Incentives ◽  
Financial Industry ◽  
Self Assessment ◽  
Content Type ◽  
Internal Auditors ◽  
Financial Firms ◽  
Perverse Incentives ◽  
Using Data

Purpose The purpose of this paper is to understand why managers, internal auditors and compliance staff (in financial firms specifically and using Malaysia as a concrete example) can want to ignore compliance-related legislation (a law on anticompetitive behaviour in this case). Design/methodology/approach The authors review, discuss and critique the literature on compliance and institutions in the light of existing data from Malaysia’s financial industry (literally confronting theory with data). Findings Legislative design can actually encourage managers and their auditors disobey/ignore the law for reasons which previous theories cannot explain. Research limitations/implications This research does not use the regression techniques in vogue now. The findings, nevertheless, imply that attempts to explain phenomenon in management auditing should start with the laws governing managerial activity. Practical implications Auditors may use the methods used in this study to assess the extent to which financial services firms’ managers have incentives to comply with laws. Similarly, this research can quantify the extent to which internal auditors in these firms have incentives to find untoward conduct. Social implications Poorly designed laws affecting managerial auditing derive from pre-existing social relationships, as well as help shape them (as shown using data). Identifying areas of non-compliance may actually signal deeper problems in the way businessmen and lawmakers make and enforce laws requiring compliance and self-assessment. Originality/value The authors know of no study looking at the economic incentives driving internal auditors’ behaviour – particularly in the area of antitrust. They show how law shapes management and auditors’ incentives, quantify these incentives and show how/why previous research fails to explain these incentives.

What is your desire? Retail investor preferences in structured products

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rainer Baule ◽  
Patrick Muenchhalfen
Keyword(s):  
Design Methodology ◽  
Recent Literature ◽  
Product Structure ◽  
Content Type ◽  
Financial Products ◽  
Retail Investors ◽  
Retail Investor ◽  
Retail Products ◽  
Structured Financial Products ◽  
Insight Into

PurposeThe authors evaluate the preferences of retail investors with regard to the investment in structured financial products. The purpose of the paper is an analysis of the relative importance of key product attributes namely the issuing bank, the product structure, the associated costs and the disclosed risk.Design/methodology/approachThe authors conduct a choice-based conjoint analysis, based on an online experiment. Participants judge their preferences for products which are presented by shortened key information documents according to the requirements of EU regulation.FindingsInvestors consider the costs and the product structure to be most important, whereas the issuer and information on risk are of less interest. Their preferences depend on their (self-evaluated) expertise: while inexperienced retail investors concentrate on costs, experienced investors pay more attention to the product structure.Research limitations/implicationsThe study is limited to a subsegment of the market, the discount certificates. For these products, issuing banks gain insight into the attractiveness of their products. Furthermore, the study carries implications for regulators: since investors emphasize the costs in their decisions, an unbiased disclosure of costs should be enforced.Originality/valueWhile the recent literature has studied preferences for the investment in mutual funds, this is the first paper which directly analyzes the drivers of an investment in structured retail products.

How do firms manage their interest rate exposure?

2019 ◽  
Vol 20 (5) ◽  
pp. 501-519 ◽  
Author(s):  
Andreas Hecht
Keyword(s):  
Risk Management ◽  
Interest Rate ◽  
Cash Flow ◽  
Fair Value ◽  
Separate Analysis ◽  
Content Type ◽  
Financial Firms ◽  
Exposure Data ◽  
Before And After ◽  
Data Granularity

Purpose This paper aims to identify how non-financial firms manage their interest rate (IR) exposure. IR risk is complex, as it comprises the unequal cash flow and fair value risk. The paper is able to separate both risk types and investigate empirically how the exposure is composed and managed, and whether firms increase or decrease their exposure with derivative transactions. Design/methodology/approach The paper examines an unexplored regulatory environment that contains publicly reported IR exposure data on the firms’ exposures before and after hedging. The data were complemented by indicative interviews with four treasury executives of major German corporations, including two DAX-30 firms, to include professional opinions to validate the results. Findings The paper provides new empirical insights about how non-financial firms manage their interest rate exposure. It suggests that firms use hedging instruments to swap from fixed- to floating-rate positions predominantly in the short-to medium-term, and that 63 [37] per cent of IR firm exposure are managed using risk-decreasing [risk-increasing/-constant] strategies. Practical implications Interviewed treasury executives suggest that the advanced disclosures benefit various stakeholders, ranging from financial analysts and shareholders to potential investors through more meaningful analyses on firms’ risk management activities. Further, the treasury executives indicate that the new data granularity would enable firms to carry out unprecedented competitive analyses and thereby benchmark and improve their own risk management. Originality/value The paper is the first empirical study to analyze the interest rate activities of non-financial firms based on actually reported exposure data before and after hedging, rather than using proxy variables. In addition, the new data granularity enables a separate analysis of the cash flow and fair value risk to focus on the non-financial firms’ requirements.

Tie me to the mast: artificial intelligence & reputation risk management

2018 ◽  
Vol 39 (1) ◽  
pp. 61-64 ◽  
Author(s):  
Peter Buell Hirsch
Keyword(s):  
Artificial Intelligence ◽  
Machine Learning ◽  
Risk Management ◽  
Thought Experiment ◽  
Early Stage ◽  
Stress Test ◽  
Risky Behaviors ◽  
Content Type ◽  
Early Signs ◽  
Reputation Risk

Purpose Artificial intelligence and machine learning have spread rapidly across every aspect of business and social activity. The purpose of this paper is to examine how this rapidly growing field of analytics might be put to use in the area of reputation risk management. Design/methodology/approach The approach taken was to examine in detail the primary and emerging applications of artificial intelligence to determine how they could be applied to preventing and mitigating reputation risk by using machine learning to identify early signs of behaviors that could lead to reputation damage. Findings This review confirmed that there were at least two areas in which artificial intelligence could be applied to reputation risk management – the use of machine learning to analyze employee emails in real time to detect early signs of aberrant behavior and the use of algorithmic game theory to stress test business decisions to determine whether they contained perverse incentives leading to potential fraud. Research limitations/implications Because of the fact that this viewpoint is by its nature a thought experiment, the authors have not yet tested the practicality or feasibility of the uses of artificial intelligence it describes. Practical implications Should the concepts described be viable in real-world application, they would create extraordinarily powerful tools for companies to identify risky behaviors in development long before they had run far enough to create major reputation risk. Social implications By identifying risky behaviors at an early stage and preventing them from turning into reputation risks, the methods described could help restore and maintain trust in the relationship between companies and their stakeholders. Originality/value To the best of the author’s knowledge, artificial intelligence has never been described as a potential tool in reputation risk management.

scholarly journals Risk of regulatory failure of “risk-based regulation” while using enterprise risk management as a meta-regulatory toolkit

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohammad Moniruzzaman
Keyword(s):  
Risk Management ◽  
Financial Regulation ◽  
Self Regulation ◽  
Secondary Data ◽  
Enterprise Risk Management ◽  
Regulatory Regime ◽  
Content Type ◽  
Enterprise Risk ◽  
Regulatory Failure ◽  
Risk Managers

PurposeDebate is growing around the expansion of risk-based regulation. The regulation scholarship provides evidence of regulatory failure of the risk-based approach in different domains, including financial regulation. Therefore, this paper aims to provide cautionary evidence about the risk of regulatory failure of risk-based strategy in the financial regulation while using enterprise risk management (ERM) as a meta-regulatory toolkit.Design/methodology/approachBased on interview data gathered from 30 risk managers of banks and five regulatory personnel, combined with secondary data, this study mainly explores the challenges for meaningful use of ERM based self-regulation in regulated banks. The evidence helps to assess the risk of regulatory failure of the risk-based regulation while using ERM.FindingsThe evidence reflects that regulated banks face diverse challenges arising from both peripheral and internal environments that limit the true internalization of ERM-based self-regulation. Despite this, the regulator uses this self-regulation as a meta-regulatory toolkit under the risk-based regulation to achieve the regulatory aims. However, the lack of true internalization of ERM based self-regulation is likely to raise the risk of regulatory failure of risk-based regulation to achieve the regulatory goals. Risk-based regulation is an evolving strategy in the regulatory regime. Therefore, care should be taken while using ERM as a regulatory toolkit before relying on it substantially.Originality/valueThe paper provides empirical insights about the challenges for effective use of ERM as a meta regulatory toolkit that might be useful practically both to the regulators and regulated firms.

Price risk management in BOT railroad construction projects using financial derivatives

2018 ◽  
Vol 23 (3) ◽  
pp. 349-362 ◽  
Author(s):  
Mohammad Vahdatmanesh ◽  
Afshin Firouzi
Keyword(s):  
Risk Management ◽  
Construction Projects ◽  
Financial Derivatives ◽  
Price Risk ◽  
European Options ◽  
Financial Industry ◽  
Content Type ◽  
Construction Company ◽  
Construction Companies ◽  
Valuation Model

Purpose Railroad transit infrastructures are amongst major capital-intensive projects worldwide, which impose significant risks to the contractors of build-operate-transfer projects because of the fluctuations in steel price fluctuation. The purpose of this paper is to introduce a methodology for hedging steel price risk using financial derivatives. Design/methodology/approach Cox–Ross valuation lattice has been used as an option valuation model for determining option’s price for the construction companies involved in fixed-price railroad projects. A sensitivity analysis has been conducted using the financial option Greeks to evaluate the impacts of option’s pricing factors in the total price of option. Findings The result of valuation shows that European options cost to safeguard against the effects of price risk is only a fraction in contrast to the total cost of steel procurement for a typical railroad construction company. This confirms that using this kind of financial derivative is a beneficial yet effective approach for hedging steel price risk for railroad construction companies. Practical implications The applicability of the financial derivatives, both exchange-traded and over-the-counter instruments, is evident in broad financial industry. This paper shows how European options can be readily used for risk management of a typical railroad project, and explains the methodology in a step-by-step procedure. Originality/value Although the financial engineering literature is rife of theory and application of derivatives in various contexts, to the best knowledge of authors there is only few papers on the application of these well-developed financial instruments for risk management in construction industry. This study intends to illustrate how financial derivatives can add value to risky construction projects and shed new light in this important application area.

Supporting strategic success through enterprise-wide reputation risk management

2016 ◽  
Vol 17 (1) ◽  
pp. 26-45 ◽  
Author(s):  
Nadine Gatzert ◽  
Joan Schmit
Keyword(s):  
Risk Management ◽  
Future Research ◽  
Risk Governance ◽  
Content Type ◽  
Risk Management Framework ◽  
Technological Advances ◽  
Key Stakeholders ◽  
Enterprise Risk ◽  
Reputation Risk ◽  
Strategic Success

Purpose – The purpose of this paper is to present a coherent and effective enterprise risk management (ERM) framework that includes necessary steps and processes for integrating reputation risk management into an organization’s overall ERM approach which is intended to support corporate strategic success. In particular, reputation creation, enhancement, and protection are critical to an organization’s success, yet highly challenging given the wide ranging and somewhat opaque nature of the concept. These qualities call for a strong ERM approach to reputation that is holistic and integrative, yet existing knowledge of how to do so is limited. Design/methodology/approach – The paper evaluates and synthesizes existing reputation literature in developing an enterprise-wide reputation risk management framework incorporating necessary steps, processes, and considerations. We address risk strategy, risk assessment, risk governance, and risk culture as key elements of ERM and conclude with suggestions for future research. Findings – The results suggest several important ideas which are of great relevance when integrating reputation risk management into an ERM framework. Among these are the importance of: identifying and understanding the purpose of key stakeholders, appreciating the multidimensional and layered effect of events on organizational reputation and monitoring the influence of technological advances. Originality/value – The authors contribute to the literature by developing a framework for enterprise-wide reputation risk management that applies across industries. In contrast to previous work, the authors offer a broader perspective on the underlying causes and consequences of reputation damage based on empirical evidence and insight from the academic literature and provide additional detail in identification of reputation determinants, antecedents, and drivers. While much of this information exists in various places in the literature, it has not been organized into a cohesive framework nor used in developing an ERM strategy.

SEC and FINRA broker-dealer exam priorities for 2019: how to prepare

2019 ◽  
Vol 20 (4) ◽  
pp. 1-8
Author(s):  
Laura S. Pruitt ◽  
David P. Bergers ◽  
Eric A. Love
Keyword(s):  
Financial Risks ◽  
Financial Industry ◽  
Regulatory Requirements ◽  
Content Type ◽  
Policies And Procedures ◽  
The Us ◽  
Retail Investors ◽  
Market Infrastructure ◽  
Practical Implications ◽  
Digital Assets

Purpose The purpose of this paper is to summarize and analyze the 2019 broker-dealer examination priorities of the Financial Industry Regulatory Authority (“FINRA”) and the US Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”). Design/methodology/approach This paper provides an overview of the FINRA and OCIE examination priorities for the year, details particular aspects of both regulators’ priorities that may be of interest to broker-dealers and provides practical tips to prepare for a regulatory exam. Findings In 2019, OCIE intends to prioritize retail investors, compliance and risk in registrants responsible for critical market infrastructure, digital assets, cybersecurity and anti-money laundering programs. FINRA will focus on a number of materially new areas of attention, as well as on sales practice, operational, market and financial risks. Practical implications Broker-dealer firms should review their policies and procedures in the areas highlighted by FINRA and OCIE, both to ensure that the procedures are consistent with existing regulatory requirements and to assure that firm personnel are actually complying with those policies and procedures. In situations where the firm’s practices have changed over time, firms should amend their policies and procedures to comport with current practices. Originality/value This paper provides an overview of the notable aspects of both regulators’ examination priorities that are particularly relevant to broker-dealers and recommends ways that firms can prepare for examinations on those issues.

An examination of US dollar risk management by Canadian non‐financial firms

2008 ◽  
Vol 31 (8) ◽  
pp. 570-582 ◽  
Author(s):  
Alex Faseruk ◽  
Dev R. Mishra
Keyword(s):  
Risk Management ◽  
Financial Statements ◽  
Content Type ◽  
Financial Firms ◽  
Hedging Strategies ◽  
A Value ◽  
Operational Hedging ◽  
Financial Hedging ◽  
Us Dollar ◽  
The Impact

PurposeThe purpose of this paper is to examine the impact of US dollar exchange rate risk on the value of Canadian non‐financial firms.Design/methodology/approachThe sample, from the Compustat database, includes all non‐financial Canadian firms with sales over $100 million. The study segregates firms into hedging and non‐hedging groups and applies statistical techniques to test if hedging enhances value.FindingsThe results demonstrate that Canadian firms that have higher levels of US$ sales tend to use derivatives more frequently through higher levels of US$ exposure. Firms that have both US sales and assets appear less likely to use hedging. Firms with an American subsidiary and use financial instruments to hedge have higher values. When operational hedging is used with financial hedging, it is a value enhancing activity increasing their market‐to‐book by 14 per cent and market value‐to‐sales by 40 per cent. Incremental impact of these two hedging strategies is to enhance value by 7 per cent.Research limitations/implicationsThe sample from Compustat captures large capitalization Canadian firms but ignores about 75 per cent of Canadian firms. There is a bias towards larger firms. Some hedging items are not disclosed on financial statements. A survey would enhance and complement these results.Practical implicationsThe paper finds that it is important for Canadian firms that have exports denominated in US dollars to hedge their exposure. The full value of hedging is reaped by using both operational and financial hedges.Originality/valueThis study is the first that examines US dollar risk management by Canadian firms.

Risk management practices adopted by financial firms in Malta

2014 ◽  
Vol 40 (6) ◽  
pp. 587-612 ◽  
Author(s):  
Frank Bezzina ◽  
Simon Grima ◽  
Josephine Mamo
Keyword(s):  
Risk Management ◽  
Competitive Advantage ◽  
Corporate Culture ◽  
Financial Stability ◽  
Management Practices ◽  
Added Value ◽  
Small Island ◽  
Content Type ◽  
Corporate Strategies ◽  
Financial Firms

Purpose – The purpose of this paper is to bring to light the risk management practices adopted by financial firms in the small island state of Malta. It seeks to: first, identify the risk management strategies and mechanisms that these firms adopt to manage risks, maximise opportunities, and maintain financial stability; second, determine whether these practices are perceived as contributing to principled performance; third, examine the extent to which risk management capabilities offer competitive advantage to firms, and fourth, investigate whether corporate social responsibility (CSR) is a key driver of risk management corporate strategies. Design/methodology/approach – A self-administered questionnaire purposely designed for the present study was distributed among the 156 credit institutions, investment firms and financial institutions registered with the Malta Financial Services Authority. Overall, 141 firms participated in the study (a response rate of 90.4 per cent) and the responses were subjected to statistical analysis in an attempt to answer four research questions. Findings – Maltese financial firms have sound risk management practices that link positively with added value and principled performance. Although competitive advantage has been given less weight by these firms, the implemented risk management mechanisms allow for a strong risk culture, defined risk management goals, accountability and continual improvement. CSR forms part of the firms’ risk management corporate strategies and is valued as part of these firms’ corporate culture, while financial/economic factors are viewed as key in driving effective risk management principles. Originality/value – The study provides empirical evidence that securing “best practice” in firms’ risk management corporate culture is seen as better predicated on maximising financial advantage (“the instrumental driver”) rather than simply reflecting externally imposed standards (“the compliance driver”).

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