The Significance of Reputational Risk : New Evidence in Small Island Offshore Financial Centres

This paper investigates whether the poor reputation of a small island offshore centre would affect the centre's economic growth, foreign direct investment, broad money supply, or international reserves. To estimate the potential reputational shock, we use the vector error correction model and the impulse response function within a framework of short-term dynamics and the impact of each variable on the system. The main findings suggest that favourably-listed offshore islands such as Cyprus, Malta, Mauritius and Singapore are less affected by reputational shock. For all sixteen sample islands, reputational shock was found to be long-lasting but not permanent, regardless of reputation (blacklisted or cooperative), with consequences for the stability of small island economies. Further, the results for all the islands indicate that foreign direct investment becomes more variably cointegrated after the shock. The blacklisted islands adopted heterogeneous after-shock policies for money supply, while the opposite was found for favourably-listed islands. In summary, the key message from the study is that a favourable reputation would undoubtedly be essential for an island's economic and financial stability