Chapter 2 Literature Review

Operational Risk
“Operational risk defines to the potential for financial losses resulting malfunctions, disruption
and errors in policies, processes, events and systems that affect the fundamental functioning of
business. Factors such as fraudulent activities, mistakes of employees and unforeseen incidents
can all participate to operational risk” (Morgan, 2021). Operational risk includes the
uncertainties and risk that a company encounter during day to day business procedures, system
and operation. It focuses on human elements, as failures or errors resulting from decisions or
actions of employees play a significant role in operational risk (SEGAL & DRURY, 2022).

A stable financial sector plays a significant in development and improving growth of economy
by facilitating resource militarization for investment. Furthermore, it offers a framework for
executing monetary strategies. In any economy, the banking sector holds significant importance
due to basic functions of reallocating funds from extra agents to those in requirement. The paper
investigated the impact of operational risk on performance of finance of commercial bank in
Tanzania. The study comprises of 36 commercial banks in Tanzania of 31 st December 2013,
making it not important to use sampling techniques. Thus, the sample was integrated in the
study; utilize accessible secondary data from all commercial banks and Bank of Tanzania. A
descriptive survey method was employed to collect secondary data from reports of finance of
commercial banks in Tanzania across from 2009 to 2013. Regression analysis was conducted to
establish the impact of management of operational risk on the financial performance of these
banks. In this analysis, variable included insolvency risk, operational efficiency and credit risk
which are offered by Tanzania Bank. The dependent variable included to this study was financial
performance of commercial bank in Tanzania, which is measured using return on assets as a
percentage. The study finding confirmed that independent variables , insolvency risk, operational
efficiency, credit risk showed varying degrees of association with commercial bank financial
performance in Tanzania. The study discovered that effective management of operational risk
had a significant influence on return of commercial banks in Tanzania. Moreover, the research
developed a significant relationship between financial performance and operational efficiency of
commercial bank in Tanzania, while insolvency risk and credit risk were found to have negative
impact on their financial performance. As a result, the study suggested that commercial banks
suitably manage their risk factors, as variation in these factors, like operational risk which lead to
currency adversely and devaluation affect the commercial banks performance listed in the Stock
Exchange Dar es Salaam (LYAMBIKO, 2017).

The rising loses acquired by Banks due to inadequate practices in managing operational risk and
ensuring negative influence on their financial performance have become a important concern for
both regulators and bank management. Thus, the study aimed to access how practices of
operational risk management affect the commercial banks financial performance in Nigeria. The
paper employed 10 years of secondary data (2008-2017) derives from audited financial
statements of selected commercial banks in Nigeria. The data analysis was done by Linear
Multiple Regression Model. The results established a significant relationship between financial
performance of bank and operational risk management. It was exhibited that effective practices
of risk management have a favorable impact on financial performance of banks. As a result, the
study suggested that bank management assign enough resources to understand operational risk,
ensuring robust practices of operational risk management and eventually improving the banks
financial performance. It is significant to note that this paper had restricted scope, upcoming
research with large size of sample would offer further interest and insights (Fadun & Solomon,
2020).

The Basel Committee for Bank Supervision goal is to buildup stability of banking system by
creating regulatory framework and effective supervision for global banking operation. The
committee provides suggestions regarding market risk, capital risk and operational risk with the
mean of ensuring that financial institutions maintain adequate capital reserves to absorb
unforeseen losses. Based on foundation, the research seeks to investigate the impact of
operational risk management policies on financial performance of chosen key commercial banks
in Cameroon. In this study, a quantitative design of case study was employed, maintained by
philosophical principles of positivism epistemology and objectivism ontology. The structured
questionnaire was used to collect primary data which were distributed to purposive sample of
250 employees from United Bank for Africa, National Financial Credit Bank and Eco bank,
showing the littoral and central regions of Cameroon. The data was collected and analyzed
through Structural Equation Modeling with Amos 24 software and assistance of SPSS 23. The
study findings indicated that practices of operational risk management, risk control and
monitoring, reporting positively and significantly affect the financial performance. The paper
suggested that execution of internal operational risk management policies leads to an
enhancement in financial performance. Furthermore, risk control and monitoring were found to
have mediated role between reporting and training and financial performance. The study also
suggested the adoption of operational risk management policies as outlined in the Base 1,2 3 and
4 accord, as they are significant drivers of resilient and stable financial system in the context of
Cameroon (Isoh, Ambang, & NCHANG, 2020).

Reputational Risk
Reputational risk defines to the danger of damaging the positive image other hold, or should hold
of our organization, services and products or ourselves. It resulted in many undesirable results,
such as prospective or loss of existing clients,, decreases revenue , increased scrutiny from
regulatory bodies and government , decline or embarrassment in reputation (Gonzalez, 2020).

Corporate reputation and linked risk to that reputation are becoming progressively significance
for organization, as they have direct influence on organizational value. The paper aimed to
provide a deep overview of empirical research on the association between corporate reputations,
reputation damaging events, corporate financial performance, considered behavior of
stakeholder. The aim was to assess the extent to which current literature permits for holistic
comprehensive understanding of these association, specifically in aspect of casual chain of
events which is important for reputation risk management and effective management. The paper
emphasized on empirical evidences concerning the impact of corporate reputation on financial
performance and behavior of stakeholders. Lastly, the paper discussed the executions for
management of risk and highlighted the requirement for upcoming research in this area. By
synthesizing the results from many studies, the study aimed to improve the understanding the
complex dynamics between, reputation risk, behavior of stakeholders, reputation, financial
performance, offering valuable insights for managing these aspects efficiently (Gatzert, 2019).

The organization globally have identified the increasing the importance of reputation as a factor
of crucial risk. The factor has been highlighted y several survey such as the Deloitte Global
Survey, which recognized reputational risk as the top policies business risk in 2014. In the same
way, research conducted by survey of AON Global Risk Management in 2015 and in 2016
Allianz Risk Barometer Survey exhibited that business executive consider reputational loss as
one of most important risk. The significance of reputation is further underscore by the fact that it
accounts for more that 25 % of organizational market value and total market capitalization of S
& P 500 companies. The paper studied to discover the association between financial performance
and corporate reputation. The study used survey methodology and conducted in 2015 in Croatia.
The questionnaire was used to asses corporate reputation consisted of three dimensions,
corporate integrity, product, services and performance of organization. The dimension of
finance included indicators, Return on Capital Employed (ROCE), Return on Assets (ROA),
Return on Equity, , EVA ( Economic Value Added) and the financial stability coefficient . For
data analysis, hierarchical regression method was used. The results indicated that dimension of
corporate reputation can serve a important predictor of financial performance. The findings
provided compelling evidence for business executive to indentify the reputational risk as critical
aspect of corporate business policy. It highlighted the significance of actively safeguarding and
managing corporate reputation to improve financial performance (Vig, 2019) .

The recognition of drivers for risk of reputation remains indistinct, making it demanding to
conduct quantitative research and proactively manage on such kind of risk. Although the Basel
Committee on Banking Supervision fosters financial institutions to systematically recognize
these drivers, the problems of recognizing them still remain unclear. Therefore, study aimed to
systematically recognize the driver’s reputational risk by evaluating textual risk disclosure in
financial reports. The evaluation exhibited that financial reports include information of sample
about causes of reputational risk, recommending that the possibility of recognizing these drivers
in a systematic manner. To precisely extract drivers of reputational risk from unstructured and
vast textual data, a method of text mining is customized to accommodate noise words found in
this data. By evaluation of 352,326 risk heading obtain from 11,921 annual reports released by
1,570 U.S. financial institution between 2006 and 2019, a total of 13 drivers of reputational risk
were recognized, expanding upon current research. Additionally, the research quantifies the
significance of drivers and their change over time to recognize the more concerning
determinants. The paper finding can offer clarity reputational risk sources, helping organizations
in executing proactive reputational risk management policies, providing theoretical foundations
for future quantitative studies, specifically in area of reputational risk measurement (Zhu, Wang,
& Li, 2022).
Pérez-Cornejo & Quevedo-Puentez (2019) focused on corporate reputation has consistently
suggested that risk of reputation, which defined to potential reputational loss, rises from many
factors faced by organization. The study emphasized on the influence of enterprise risk
management system which were employing by organization to manage all risk on reputation of
corporate. Furthermore, considering the audit committees responsibility in overseeing system of
ERM, the study examined how attributes of audit committees, such as knowledge and
independence and diligence of their independent members, impact the reputation of corporate
thorough their impact on quality of ERM system. Overall findings, sample based of publicly
listed Spanish organization, support the statement made by consultants that system of ERM serve
as important tool for managing corporate reputations. Additionally, the study demonstrated that
audit committee independence improves corporate improve the corporate reputation by ERM
system. Finally, the results indicated that positive association between reputational risk and
financial performance. These results offered empirical evidences that system of ERM can serve a
platform for effectively manage the financial losses and mentioned the significance of the audit
committee as ERM system supervisor and corporate reputation protector.

References

Fadun, & Solomon, O. (2020). Impacts of Operational Risk Management on Financial

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Gatzert, N. (2019). The impact of corporate reputation and reputation damaging events on
financial performance: Empirical evidence from the literature. European Management Journal ,
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Gonzalez, D. (2020). Reputational Risk. Science Direct .

Isoh, A. V., Ambang, E. M., & NCHANG, N. D. (2020). ASSESSING THE IMPACT OF OPERATIONAL
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