TLDR

  • Fed proposes rule to remove reputation risk from bank supervision
  • Public comments are due within 60 days of the Federal Register notice
  • Examiners are directed to concentrate on significant financial and compliance risks
  • Policy states banks should not deny services for lawful activities

The Federal Reserve Board has requested public input on a proposal to formally integrate the exclusion of “reputation risk” from its bank supervision framework. This request follows earlier actions taken in June to remove the concept from examination programs.

The Board stated that the proposal aims to ensure that supervisory decisions are based on material financial risks. It also seeks to enhance clarity and consistency in oversight. Comments will be accepted for 60 days following publication in the Federal Register.

Vice Chair for Supervision Michelle W. Bowman addressed concerns regarding debanking. “We have heard troubling instances of debanking—where supervisors use concerns about reputation risk to pressure financial institutions into debanking customers due to their political views, religious beliefs, or involvement in disfavored but lawful businesses,” she stated.

Bowman further noted that discrimination on such grounds is unlawful and has no place within the Federal Reserve’s supervisory framework. The Board affirmed that lawful activity alone should not be grounds for account closures or service denials.

Focus on measurable financial risks

The proposed rule directs examiners to concentrate on tangible and quantifiable risks. These include credit risk, liquidity risk, operational risk, and compliance failures. The Board indicated that supervisory actions must be supported by evidence and documented findings.

Under the proposal, examiners should not cite reputational concerns tied to lawful customer activities. Instead, they must evaluate whether a bank’s risk management adheres to safety and soundness standards. The Board suggested that this approach would foster a predictable supervisory process.

The regulator clarified that this change does not diminish oversight. Banks are still required to maintain robust internal controls and comply with all applicable laws and regulations. Supervisors will continue to assess governance and risk management practices.

Addressing concerns about debanking

The Federal Reserve’s action comes in response to reports of certain industries facing restricted access to banking services. Some companies in sectors like digital assets and cryptocurrency have cited reputational risk concerns as reasons for account terminations.

The Board stated that financial institutions should not terminate accounts solely because a business operates in a lawful but controversial sector. It emphasized that lawful businesses must be assessed based on their financial risk and compliance record.

The proposal specifies that supervisory guidance should avoid ambiguous standards. Examiners are instructed to provide clear justifications when identifying deficiencies. The Board indicated that this will assist banks in understanding expectations and responding effectively.

This change also aligns with the Board’s stated emphasis on core financial risk. By removing reputation risk from oversight policy, the regulator aims to focus supervision on measurable factors. These include capital adequacy, asset quality, earnings, and liquidity.

Public comment process and next steps

The Board of Governors has released the proposed rule for public review. Stakeholders, including banks and consumer groups, have the opportunity to submit comments during the 60-day period. Following a review of the feedback, the Board may amend and finalize the rule.

The proposal builds upon previous announcements and reflects the Board’s current supervisory philosophy. It asserts that equitable access to financial services must be balanced with safety and soundness standards. Supervisory actions must remain grounded in law and evidence.

If adopted, the rule would formally eliminate reputation risk from Federal Reserve oversight policy. The Board stated that this would lead to greater precision in supervisory decision-making while upholding regulatory compliance requirements.