The Federal Deposit Insurance Corp. will stop using reputational risk in its supervision of financial institutions, the agency’s acting chair, Travis Hill, wrote Monday in a letter to Rep. Dan Meuser, R-PA. Meuser chairs the House Subcommittee on Oversight and Investigations.
“While a bank's reputation is critically important, most activities that could threaten a bank's reputation do so through traditional risk channels (e.g., credit risk, market risk, etc.) that supervisors already focus on,” Hill wrote. “Meanwhile, ‘reputational risk’ has been abused in the past, and adds no value from a safety and soundness perspective as a standalone risk.”
The FDIC has completed a review of all mentions of reputational risk and similar terms in its policy documents and “plans to eradicate this concept from our regulatory approach,” Hill wrote.
The Federal Reserve defines reputational risk as “the potential that negative publicity regarding an institution's business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions.”
It’s a hot topic of late, and the FDIC’s move comes on the heels of a similar one by the Office of the Comptroller of the Currency. That agency last week said it would stop examining financial institutions for reputational risk and remove references to reputational risk from its guidance.
Earlier in the month, Senate Banking Committee Chair Tim Scott, R-SC, introduced a bill meant to eliminate reputational risk as a metric that regulators use to gauge the safety and soundness of banks.
Scott dubbed the bill a first step in ending “de-banking” – a practice in which banks close accounts they deem too risky to hold.
President Donald Trump publicly accused Bank of America and JPMorgan Chase in January of de-banking conservatives – allegations the banks both deny.
“We never close accounts for political reasons and don’t have a political litmus test,” a spokesperson for Bank of America said at the time.
“We have never and would never close an account for political reasons, full stop,” a JPMorgan spokesperson said.
JPMorgan CEO Jamie Dimon, on a podcast the same week, added: “When we debank someone, they often blame that reason, but that’s not a reason.”
Bank of America CEO Brian Moynihan in February said, “We bank everybody,” adding that “the real question was about over-regulation, frankly.”
Trump, however, continued the narrative. The Trump Organization sued Capital One this month and asserted the lender debanked some 300 Trump Organization accounts because it believed “the political tide at the moment favored doing so,” according to the lawsuit.
The crypto industry, too, has long accused regulators of forcing financial institutions to de-bank companies associated with digital assets.
Hill’s letter mentions digital assets, noting that the FDIC had previously been “closed for business” to any bank expressing interest in blockchain technology. Under Hill, the FDIC is “actively working on a new direction on digital assets policy,” he wrote.
The FDIC is moving forward with a reformed supervisory approach, which will likely entail a multiyear process to include a shift in tone and emphasis from leadership, a shift in how the FDIC trains examiners, and policy changes to ratings and examinations, Hill wrote.
