FDIC will eliminate reputational risk from bank supervision

Bloomberg News

The Federal Deposit Insurance Corp. aims to eliminate reputational risk from all supervision, the second bank regulator to do so as the Trump administration seeks to curb what it calls the debanking of lawful businesses.

In a March 24 letter to House Financial Services Committee member Rep. Dan Meuser, R-Pa., obtained by American Banker, Acting Federal Deposit Insurance Corp. Chair Travis Hill said regulators under the Biden administration had abused the concept of reputational risk to unjustifiably deter banks from engaging with digital assets. He said the agency, working with the Treasury, was developing a framework for banks to safely engage in digital asset activities and would remove all references to reputational risk from supervisory documents.

Hill said potential harm to a bank's reputation could be managed through other supervisory measures, and the agency would soon propose a new rule to formally prevent supervisors from using reputational risk to discourage bank activities.

A longtime critic of the FDIC's crypto policies under Biden, Hill reiterated his commitment to expanding banking's access to digital assets and ensuring banks have regulatory clarity to engage with them.

He outlined steps the FDIC should take to refocus on "core financial risks," a priority he introduced early in his tenure and which he says will require reforms to the CAMELS ratings system and the FDIC examinations manual.

Hill also called for a review of the agency's policies on financial institutions' obligations to explain account closures to customers.

The Bank Secrecy Act restricts banks from revealing information about account closures, especially if a Suspicious Activity Report has been filed related to the closure. To prevent suspects from being tipped off, the BSA prohibits disclosure of such reports to individuals other than law enforcement or other regulators. 

Hill's statements on Monday respond to a February letter in which the Pennsylvania lawmaker, who is also chair of the committee's Oversight and Investigations Subcommittee, asked Hill to clarify his regulatory posture toward digital assets. The letter was signed by prominent committee Republicans including Subcommittee on Financial Institutions Chair Andy Barr of Kentucky, Digital Assets Subcommittee Chair Bryan Steil of Wisconsin and committee Chair French Hill of Arkansas.

In the February letter, the lawmakers provided Hill with a list of policy suggestions, including that the FDIC make supervisory guidance on digital assets public, clearly explain any closure of bank accounts related to the Bank Secrecy Act, and eliminate reputational risk in supervision.

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"While we understand that there is still a need for Congressional action to help clarify regulations surrounding digital assets, we hope that you will look at these recommendations and implement them appropriately," Meuser wrote in the February letter.

The move to strike reputational considerations from bank supervision is part of the Trump administration's effort to curtail what it sees as unjustified and politically motivated banking restrictions under President Joe Biden, a phenomenon known as debanking. 

The Office of the Comptroller of the Currency on Thursday said it would stop assessing reputational risk in bank examinations. Federal Reserve Chair Jerome Powell said in February that the central bank had stripped out reputational risk from its manual for considering master account access.

Reputational risk has come under fire from digital asset supporters because they argue regulators in the last administration used the metric — which gauges the potential for financial losses due to damage to a firm's credibility due to negative perceptions or events — as a faulty premise to shut crypto firms out of the financial system. 

Debanking — what it is, whether it's legal and how it works — is an ill-defined concept. While the crypto industry and its allies argue the practice targets digital asset firms and conservative-aligned businesses, critics of the debanking discourse point to the fact that access to a bank account has always come with legal and regulatory barriers to entry. Cannabis companies, underbanked or credit-invisible people and ethnic minorities are routinely denied banking services.

Regulators like the Federal Reserve's Michael Barr have insisted that the practices labeled debanking are not political but rather represent regulators exercising their safety and soundness discretion to steer banks about what kinds of businesses banks should work with.