Explain what reputation risk is and why it is dangerous to a bank.

Correct Answer:

Reputation risk is the danger that a bank will lose the trust and confidence of customers, investors, and the public because of bad publicity, poor decisions, unethical behavior, or financial trouble. It is dangerous because banking depends heavily on trust. If people believe a bank is unsafe or dishonest, they may withdraw their money, avoid doing business with it, and cause investors or lenders to pull back. This can reduce profits, damage the bank’s stability, and even lead to larger financial problems.