Leveraged Lending

Reputation Risk

Reputation risk is the current and prospective risk to earnings or capital arising from negative public opinion. This risk affects the institution’s ability to establish new relationships or services, or continue servicing existing relationships. This risk can expose the institution to litigation, financial loss, or damage to its reputation. Reputation risk exposure is present throughout the organization and includes the responsibility to exercise an abundance of caution in dealing with its customers and community. This risk is present in such activities as asset management and agency transactions.

Leveraged loans are often syndicated throughout the institutional market due to their size and risk characteristics. A bank’s failure to meet its moral, legal or fiduciary responsibilities in implementing these activities can damage its reputation and impair its ability to compete successfully in this business line.

Leveraged loans may also include the characteristics of a complex structured finance transaction. The activities associated with these transactions, as fully discussed in OCC Bulletin 2007-1, typically involve the structuring of cash flows and the allocation of risk among borrowers and investors to meet the specific objectives of the customer in more efficient ways. They often involve professionals from multiple disciplines within a financial institution and may be associated with the creation or use of one or more special purpose entities designed to address the economic, legal, tax, or accounting objectives of the customer. Although in the vast majority of cases, structured finance products and the roles played by banks with respect to these products serve legitimate business purposes of customers, banks may be exposed to substantial reputation and legal risks if they enter into transactions without sufficient due diligence, oversight, and internal controls.

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