FDIC moves to eradicate 'reputational risk' category from bank exams

The US Federal Deposit Insurance Corporation, an autarkic bureau of the national government, is reportedly moving to halt utilizing the “reputational risk” class arsenic a mode to supervise banks.

According to a missive sent by the agency’s acting chairman, Travis Hill, to Rep. Dan Meuser connected March 24, banking regulators should not usage “reputational risk” to scrutinize firms.

“While a bank’s estimation is critically important, astir activities that could endanger a bank’s estimation bash truthful done accepted hazard channels (e.g., recognition risk, marketplace risk, etc.) that supervisors already absorption on,” notes the letter, archetypal reported by Politico.

According to the document, the FDIC has completed a “review of each mentions of reputational risk” successful its regulations and argumentation documents and has “plans to eradicate this conception from our regulatory approach.”

Reputational hazard and debanking

The Federal Reserve defines reputational hazard arsenic “the imaginable that antagonistic publicity regarding an institution’s concern practices, whether existent oregon not, volition origin a diminution successful the lawsuit base, costly litigation, oregon gross reductions.”

The FIDC missive specifically mentioned integer assets, with Hill noting that the bureau has mostly been “closed for business” for institutions funny successful blockchain oregon distributed ledger technology. Now, arsenic per the document, the FDIC is moving connected a caller absorption for integer plus argumentation aiming astatine providing banks a mode to prosecute with integer assets.

The missive was sent successful effect to a February connection from Meuser and different lawmakers with recommendations for integer plus rules and ways to forestall debanking.

Industries deemed arsenic “risky” to banks often look important challenges successful establishing oregon maintaining banking relationships. The crypto manufacture faced specified challenges during what became known arsenic Operation Chokepoint 2.0.

The unofficial Operation led to much than 30 exertion and cryptocurrency companies being denied banking services successful the US aft the illness of crypto-friendly banks earlier successful 2023.

Related: FDIC resists transparency connected Operation Chokepoint 2.0 — Coinbase CLO