Federal Reserve proposes rule to codify ban on reputation risk in bank supervision
The Federal Reserve Board is inviting public comment on a proposed rule that would codify the removal of reputation risk from its supervisory programs. The proposal aims to prohibit the Board from compelling banks to deny services based on protected beliefs or lawful but politically disfavored business activities.
Codifying a shift in supervisory practice
The Federal Reserve Board is proposing to codify its policy against compelling banking organizations to deny services based on constitutionally protected political or religious beliefs, associations, speech, or conduct.
This also applies to involvement by individuals or businesses in lawful but politically disfavored activities perceived to present reputation risk.
The Board previously announced in June 2025 that reputation risk would no longer be a component of examination programs and is eliminating references in supervisory materials.
Other agencies like the FDIC, OCC, and NCUA have also moved to remove reputation risk from their supervisory programs.
The Board defines reputation risk as 'the potential that negative publicity regarding an institution's business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions.'
This concept gained prevalence in the 1990s but has since raised concerns about misuse.
Focusing on core financial risks
The proposal aims to enhance supervisory clarity by establishing a binding regulation that ensures staff actions are not based on reputation risk.
It acknowledges that reputation risk is difficult to quantify and communicate, posing challenges for firms to address.
By codifying its removal, the Board reinforces a supervisory focus on core financial risks such as credit, market, liquidity, operational, and legal risk.
The Board asserts that existing risk types sufficiently address safety and soundness concerns previously associated with reputation risk.
This initiative does not alter the Board's expectation for banking organizations to maintain robust risk management or their ability to make independent business decisions regarding customers.