FDIC Drops ‘Reputational Risk’ in Bank Examinations

YEREVAN (CoinChapter.com) — The US Federal Deposit Insurance Corporation (FDIC) is removing reputational risk as a factor in bank supervision. This change follows that of the Office of the Comptroller of the Currency (OCC), which previously stopped examining banks based on reputational risk.

A March 24 letter from FDIC Acting Chairman Travis Hill to Rep. Dan Meuser confirmed that banking regulators should not use reputational risk to evaluate financial institutions. The letter stated that while a bank’s reputation is important, most risks to reputation come through existing risk categories such as credit risk and market risk. These areas are already covered in banking regulations.

The FDIC reviewed all references to reputational risk in its policies and decided to remove the term from its regulatory framework. This decision signals a shift in how the agency approaches risk management for financial institutions.

FDIC Drops Reputational Risk from Bank Oversight Following Treasury Secretary’s Call. Source: Politico Regulatory Shift Could Impact Digital Asset Firms

The Federal Reserve defines reputational risk as potential harm from negative publicity, which could lead to customer losses, lawsuits, or reduced revenue. Many crypto firms have faced difficulties obtaining banking services due to perceived risks under this category.

Federal Reserve Guidelines on Legal and Reputational Risk in Banking Supervision. Source: Federal Reserve WEB

The FDIC letter addressed digital assets directly. It stated that the agency has been “closed for business” for financial institutions dealing with blockchain and distributed ledger technology. The document indicates that the FDIC is now reviewing its stance on digital asset policies to provide banks with a structured way to engage with cryptocurrency and related financial products.

The removal of reputational risk could mean fewer restrictions for financial institutions working with digital assets. However, the FDIC has not outlined any specific changes to its approach toward banks handling crypto-related businesses.

Congress Pressured FDIC to Address Crypto Regulations

The letter responded to a February request from Meuser and other lawmakers. They urged the FDIC to clarify digital asset regulations. Additionally, they called for reducing barriers that prevent firms from accessing banking services. The lawmakers raised concerns about debanking practices affecting certain industries.

Industries classified as high risk have struggled to establish banking relationships due to concerns about compliance and enforcement. The crypto industry encountered this issue during Operation Chokepoint 2.0. This led to over 30 cryptocurrency and technology firms losing access to banking services after the collapse of crypto-friendly banks in 2023.

The FDIC’s decision to eliminate reputational risk from its guidelines may ease restrictions for businesses previously affected by debanking policies. However, the agency has not provided details on its updated approach to digital asset regulation.