Senate Banking Committee Chairman Tim Scott introduced a bill that would stop banking regulators from using reputational risk as a measure of safety and soundness.
On Thursday, the South Carolina Republican released an outline of the bill, which aims to eliminate the ability of prudential bank regulators to write new rules or guidance that involves any use of reputational risk as a component of supervision. The bill is narrowly tailored to remove subjective factors, Scott said, and would not affect quantitative supervisory measures such as concentration risk or liquidity risk.
"We must rein in these rogue regulators," Scott said
The bill, called the Financial Integrity and Regulation Management, or FIRM, Act, would prohibit the Federal Deposit Insurance Corp., the Federal Reserve, the National Credit Union Administration and the Office of the Comptroller of the Currency from using incorporated reputational risk as a component of supervisory ratings.
The term "reputational risk" is commonly used by federal banking agencies to refer to the potential that negative publicity or public opinion about a bank's business practices could lead to a decline in confidence or customers and result in costly litigation or a drop in a bank's revenue.
Reputational risk is not required by statute and exceeds supervisory authority, Scott said. He said he aims to stop the "political weaponization" of federal prudential regulators.
Scott claims that hostile bank regulators under Democratic administrations have "weaponized their power to target disfavored political groups and individuals." Bank regulators have been "hiding behind opaque veils of confidentiality and insincere proclamations of independence," he said.
Republican lawmakers have glommed onto the practice of "
A driver of the current narrative about reputational risk has been cryptocurrency firms that claim they were denied access to banking services under the Biden administration and that have
"Federal banking agencies use reputational risk to prevent federally regulated depository institutions from providing financial services to industries that
Still, it is unclear if such a law had been in effect in 2016 that the
The bill's text states that "the use of reputational risk in supervisory frameworks encourages Federal banking agencies to regulate depository institutions based on the subjective view of negative publicity and provides cover for the agencies to implement their own political agenda unrelated to the safety and soundness of a depository institution."
Banks generally support the bill.
"We look forward to working with the chairman and the committee to address opaque and complex regulations," said Bill Halldin, a Bank of America spokesman.
Bank trade groups claim reputational risk has led to the politicization of bank exams.
Rob Nichols, president and CEO of the American Bankers Association, said the FIRM Act would restore access to banking services and give banks "the freedom to make their own decisions about who they can and cannot bank."
The bill also would limit "regulators' ability to use subjective concerns about 'reputational risk' to pressure financial institutions not to bank certain customers," Nichols told American Banker.
The Bank Policy Institute has lobbied to remove reputational risk as one measure in the supervisory exam process. Regulators, the trade group claims, are not really concerned about a bank's reputation because they do not vigorously review banks' marketing or advertising activities. Instead, regulators have tried to forbid activities that banks claim are legal and raise no material risk to safety and soundness.
Separately, House Republicans
