The U.S. Federal Deposit Insurance Corporation (FDIC) is taking significant steps to redefine its regulatory framework by eliminating the category of ‘reputational risk’ from its bank examination process. In a letter dated March 24, acting chairman Travis Hill conveyed this shift, emphasizing that while a bank’s reputation is vital, most concerns affecting it typically stem from traditional risk channels such as credit and market risks, which supervisors already monitor closely.
This decision marks a pivotal turning point for the FDIC, as it signals a departure from judging banks based on perceptions of their public image. The agency has undertaken a comprehensive review of all mentions of reputational risk in its regulations and plans to eradicate these concepts from their regulatory approach entirely.
Understanding Reputational Risk
The Federal Reserve defines reputational risk as the potential for adverse publicity regarding a financial institution’s business practices—whether accurate or not—to lead to a loss of customers, increased litigation expenses, or decreased revenues. This redefinition may enable banks to operate more freely and effectively without the looming threat of reputation-based scrutiny in their regular assessments.
In particular, the FDIC’s letter also addressed digital assets, a sector that has faced considerable regulatory hurdles. Hill acknowledged the agency has been largely unwelcoming to institutions involved in blockchain and distributed ledger technology. However, with this new directive, the FDIC is laying the groundwork for a more inclusive policy that will allow banks to engage positively with digital asset opportunities.
The motivation behind this letter was to respond to recommendations from various lawmakers, including Rep. Dan Meuser, who advocated for clearer frameworks regarding digital asset regulations and urged measures to prevent ‘debanking’—the process where banking services are denied to certain industries perceived as ‘high risk.’
Notably, risky industries, especially those in the crypto sector, have historically struggled to maintain banking relationships. Recent events have reignited concerns in this area, particularly after what has been described as Operation Chokepoint 2.0, which led to over 30 technology and cryptocurrency firms being denied banking services in the United States following the collapse of banks that supported them earlier in 2023.
This strategic shift by the FDIC is expected to foster a more dynamic banking environment, particularly for entities involved in emerging technologies and digital assets. As the agency continues to refine its approach, stakeholders in the banking and finance sectors will undoubtedly be keen to observe how these changes affect their operations and the overall market landscape.
