By Mario R. Englert, Christopher Koch, & Jens Wüstemann

Bank reputation suffers in times of financial crisis, especially when mass media (e.g., Financial Times or CNN)  portrays strong public criticism against banking organizations. This criticism leads to public pressure, which may result in institutional changes, such as the drafting of new laws (e.g., the “Single Rulebook” within the EU) and initiating new regulatory mechanisms (e.g., the “Single Supervisory Mechanism” in the Euro Area) – both of which were initiated in response to the 2008 financial crisis. Banks responded to such pressure: For instance, Deutsche Bank initiated a cultural change within their organization to counteract the criticism.

Interestingly, during the last financial crises (the ‘subprime mortgage crisis’ and ‘sovereign debt crisis’), some banks were more harshly criticized than others albeit they suffered similar financial losses. This observation motivated us to investigate what factors explain how much criticism a bank faced in times of crisis. Additionally, we wanted to understand whether there is a “winning strategy” for banks that would help them to overcome such crisis.

In our study “The Effects of Financial Crisis on the Organizational Reputation of Banks: An Empirical Analysis of Newspaper Articles”, we found that not only financial, but also non-financial factors explain public pressure. Specifically, we investigated what types of banks lose more reputation during the financial crisis. For example, we found that banks suffering larger financial losses suffer stronger reputational losses. However, we also found that non-financial features matter. In particular, we identified “familiarity” (defined by us as the perceived proximity of banks as well as the understandability and comprehensibility of their services) as a non-financial feature protecting banks’ reputation during a financial crisis.

We based our analysis on a comprehensive data sample of more than 92,000 news articles in Germany. Our sample covered the period before and during the financial crisis. Based on this sample, we measured the sentiment of each newspaper article. Thereby, we constructed for each bank a sentiment score as a measure for organizational reputation over time.

Besides the results discussed in the paper, we also observed some surprising patterns. For instance, we noted that some very familiar savings and cooperative banks gained reputation during the financial crisis. And this happened albeit these banking groups were also strongly invested in defaulting subprime assets. Furthermore, we identified differences in the individual newspaper’s stance towards banking organizations, supporting the reliability and accuracy of our sentiment score. For example, newspapers geographically close to the banking organization’s headquarters reported more positively about it. Further, newspapers with a perceived left-wing readership took generally a more negative stance towards the banking industry in general.

Overall, banks’ reputation during a financial crisis depends not only on financial, but also non-financial features. Therefore, a winning strategy to protect organizational reputation during a financial crisis should include both the financial and non-financial features. Investments in features like “familiarity” work as a “reputational insurance” in times of crisis. A further elaboration on the factors behind this “familiarity” and its drivers are at the core of our study, helping also practitioners to get a better grasp of banks’ reputation in times of crisis.

Reference:

Englert, M. R., Koch, C., & Wüstemann, J. 2020. The Effects of Financial Crisis on the Organizational Reputation of Banks: An Empirical Analysis of Newspaper Articles. Business & Society, 59, 1519–1553.