FDIC Working on Rule to Scrap Reputation Risk in Bank Exams (1)

The Federal Deposit Insurance Corp. is preparing a rule that would bar agency examiners from considering “reputational risk” when reviewing a bank’s operations.

The FDIC reviewed its existing regulations, guidance, examination manuals, and other policy documents for all mentions of “reputational risk” or similar terms with plans to “eradicate this concept from our regulatory approach,” acting Chairman Travis Hill said in a Monday letter to Rep. Dan Meuser (R-Pa.), who leads the House Financial Services Subcommittee on Oversight and Investigations.

Hill’s letter, obtained by Bloomberg Law, comes as the Trump administration and GOP lawmakers push to make it easier for cryptocurrency firms and other companies seen as politically controversial to access the traditional banking system.

Monitoring traditional factors such as credit and market risk is the best way to prevent harm to banks’ reputations, Hill said in the letter.

“Meanwhile, ‘reputational risk’ has been abused in the past, and adds no value from a safety and soundness perspective as a standalone risk,” Hill said.

Meuser applauded Hill’s letter.

“No lawful customer should be debanked without a clear reason,” he said in a statement. “The Trump Administration is right to support policies that best serve banks and their customers.”

Hill’s announcement follows similar moves from other banking regulators.

Examiners from the Office of the Comptroller of the Currency will no longer monitor national banks for risks posed by doing business with controversial customers, acting agency head Rodney Hood announced March 20.

Federal Reserve Chairman Jerome Powell in February pledged to remove language instructing reserve bank officials to watch for “controversial commentary or activities” by leaders at financial institutions they oversee.

GOP, Industry Pushback

Critics of the use of reputation risk in bank examinations say it’s too broad a category and allows supervisors to push banks to stop doing business with politically sensitive clients—such as crypto, payday lending, and oil and gas companies—even when they pose no risk to the bank’s safety and soundness.

Big banks have been pushing the Trump administration to ease up on the use of reputation risk as part of its deregulatory efforts.

“This is an important step that will increase transparency and certainty in the supervisory process while ensuring banks have the flexibility they need to serve their customers, clients and communities,” American Bankers Association President and CEO Rob Nichols said in a statement following Hood’s announcement last week.

Republican lawmakers are also targeting reputation risk as they review allegations of “debanking” raised by crypto and other companies.

The Senate Banking Committee on March 13 approved legislation (S. 875) from Chairman Tim Scott (R-S.C.) aimed at preventing all banking regulators from using reputation risk in their examinations.

Banking and other industry groups support the bill.

The US Supreme Court allowed banking and insurance regulators to use reputation risk in their examinations and enforcement actions in its ruling last May in National Rifle Association of America v. Vullo.

Regulators at the time had raised concerns that a broad ruling would have opened them up to First Amendment challenges over any use of reputation risk as part of their determinations about potentially risky bank customers.