The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) are looking to codify the removal of reputational risk their supervisory programs, and to better define the term.
The agencies have published a joint Notice of Proposed Rulemaking for a rule designed to better define reputational risk. Comments are due 60 days after the date of publication in the Federal Register.
The proposed rule would define “reputation risk” and prohibit the agencies from criticizing or taking adverse action against an institution on the basis of it. Additionally, agencies would be prohibited from “requiring, instructing, or encouraging an institution to close customer accounts or take other actions on the basis of a person or entity’s political, social, cultural, or religious views or beliefs, constitutionally protected speech, or solely on the basis of politically disfavored but lawful business activities perceived to present reputation risk.”
This proposed rulemaking would also respond to concerns expressed in Executive Order 14331, Guaranteeing Fair Banking for All Americans, issued in August, that “the use of reputation risk can be a pretext for restricting law-abiding individuals’ and businesses’ access to financial services on the basis of political or religious beliefs or lawful business activities,” the joint statement said.
The Executive Order directed banking agencies to adopt policies to ensure that financial institutions do not use reputational risk as a basis for restricting access to banking services.
“Examining for reputation risk can result in agency examiners implicitly or explicitly encouraging institutions to restrict access to banking services on the basis of examiners’ personal views of a group’s or individual’s political, social, cultural, or religious views or beliefs, constitutionally protected speech, or politically disfavored but lawful business activities,” the FDIC said in a prepared statement.
The proposed rule “would define ‘reputational risk’ as the risk that an action or activity, or combination of actions or activities, or lack of actions or activities, of an institution or its employees could negatively impact public perception of the institution for reasons unrelated to the current or future financial or operational condition of the institution.”
Without clear standards, the FDIC said the agencies’ supervision for reputation risk has been inconsistent and at times, has not been data-driven, while risks such as credit and liquidity risks are more concrete and measurable and allow examiners to more objectively assess a bank’s financial condition.
Law firm Ballard Spahr LLP noted that several financial regulators have already taken actions to remove reputational risk references:
- The OCC removed them from its handbooks and guidance documents.
- The Small Business Administration (SBA) sent letters to 5,000 lenders instructing them to end what the Fg.
- The National Credit Union Administration (NCUA) is removing reputational risk from its examination materials.
