The Federal Deposit Insurance Corporation (FDIC), an independent federal entity, is reportedly moving to discontinue the use of “reputational risk” as a supervisory measure for banks.
A letter from the agency’s acting chairman, Travis Hill, addressed to Rep. Dan Meuser on March 24, states that banking regulators should refrain from employing “reputational risk” in their evaluations of financial institutions.
“While a bank’s standing is extremely important, most actions that might jeopardize a bank’s reputation tend to do so through conventional risk channels, such as credit risk and market risk, that supervisors already prioritize,” the letter explains, as previously indicated.
The letter also mentions that the FDIC has completed a thorough review of all references to reputational risk within its regulations and policies, with intentions to eliminate this concept from the regulatory framework.
Reputational Risk and Debanking
The Federal Reserve outlines reputational risk as “the danger that negative publicity surrounding an institution’s business practices, regardless of its accuracy, will lead to a loss of customers, expensive lawsuits, or decreases in revenue.”
Hill’s letter highlighted the situation regarding digital assets, noting that the agency has largely been “closed for business” to institutions interested in blockchain or distributed ledger technology. Moving forward, the FDIC aims to develop new digital asset policies that will facilitate banks’ involvement with these technologies.
This correspondence was a response to a February letter from Meuser and other legislators recommending regulatory measures for digital assets and strategies to avoid debanking.
Sectors considered “high-risk” by banks often struggle significantly to either establish or maintain banking relationships. The cryptocurrency sector faced such obstacles during what became known as Operation Chokepoint 2.0.
This unofficial operation resulted in over 30 technology and cryptocurrency firms being denied banking services in the U.S. following the collapse of several crypto-friendly banks earlier in 2023.
Related: FDIC resists transparency on Operation Chokepoint 2.0 — Coinbase CLO