The Office of the Comptroller of the Currency will stop examining its regulated financial institutions for reputational risk and is removing reputation risk references from the agency’s handbooks and guidance, the regulator announced Thursday.
“The OCC has never used reputation risk as a catch-all justification for supervisory action,” Acting Comptroller of the Currency Rodney Hood said in a statement, adding the agency will focus future exam processes on more transparent risk areas, which will bolster public confidence in the OCC’s supervisory process and make clear that “the OCC has not and does not make business decisions for banks.”
The OCC’s move follows a call from Senate Banking Committee Chair Tim Scott, R-SC, who introduced a bill this month to eliminate reputational risk as a metric regulators would use to gauge the safety and soundness of banks.
Scott’s bill aims to curb the power of regulators who use reputational risk as a justification to de-bank businesses and individuals. The bill, which is headed to the Senate floor, has support from banking and industry trade groups.
One trade group, the Bank Policy Institute, said the OCC’s announcement Thursday would help “restore fairness to bank supervision.”
“Bank exams should be transparent and grounded in objective legal standards,” said Greg Baer, BPI’s CEO. “This marks meaningful progress in refocusing oversight on material financial risk, rather than reputational risk, operational risk, corporate governance, vendor management and other matters that do not pose a material threat to safety and soundness.”
Konrad Alt, a partner at financial services advisory and investing firm Klaros Group, noted there is little connection between reputation risk and de-banking since the former has been around for decades while de-banking is a recent concept.
Alt said reputational risk is a complex analysis often linked to operational issues like financial losses or misbehavior rather than subjective judgments. Bank reputation management is a business judgment with room for variation in the industry and is not easily regulated, he said.
“Reputational risk is kind of a second-order problem. It's much less measurable, it’s much less concrete, it's just too squishy,” Alt said, adding that that makes for less effective regulation.
De-banking has become a topic of debate after President Donald Trump called out Bank of America and JPMorgan Chase during a virtual appearance in January at the World Economic Forum in Davos, Switzerland.
Sen. Elizabeth Warren, D-MA, said last month that nearly 12,000 de-banking-related complaints were filed by consumers over the past three years, with more than half of those complaints made against the four biggest U.S. banks – JPMorgan Chase, Bank of America, Citi and Wells Fargo – all of which are regulated by the OCC.
The OCC omitting references to reputation risk does not change the agency’s stance that banks must remain diligent and adhere to robust risk management practices across all other risk areas, Hood noted.
“The OCC’s examination process has always been rooted in ensuring appropriate risk management processes for bank activities, not casting judgment on how a particular activity may fare with public opinion,” he said.
The agency expects to update its public documents in the coming weeks.
The OCC is not the only regulator to pledge to remove specific language from its manuals. Federal Reserve Chair Jerome Powell said the central bank would remove language asking its representatives to keep an eye on “controversial commentary or activities” by a financial institution’s leadership. Sen. Cynthia Lummis, R-WY, noted the language at a hearing last month, accusing the Fed of restricting access to the banking system for some institutions.
