Fed Drops ‘Reputation Risk’ From Bank Exams Amid Backlash To Debanking

Authored by Tom Ozimek via The Epoch Times,

The Federal Reserve announced on June 23 that it will no longer factor “reputation risk” into its bank examinations, a move aligned with efforts by Republican lawmakers and the Trump administration to combat what they describe as politically motivated financial discrimination—particularly debanking.

The central bank said in a statement it has begun reviewing and revising its supervisory materials to remove references to reputation risk, replacing them where appropriate with more specific discussions of financial risk.

In its June 23 announcement, the Fed said it has started the process of reviewing references to reputation risk in its supervisory materials and replacing them, when appropriate, with more specific discussions of financial risk.

“This change does not alter the Board’s expectation that banks maintain strong risk management to ensure safety and soundness and compliance with law and regulation,” the Fed said in a statement.

The decision marks a significant shift in how regulators assess banks, particularly as scrutiny intensifies over claims that some institutions have denied services to lawful businesses—such as cryptocurrency firms, religious organizations, or political groups—based on subjective concerns about reputational harm.

Although banks generally have wide discretion over account relationships, critics argue that invoking reputational risk can mask discriminatory decisions. These concerns have fueled growing bipartisan calls to ensure fair access to financial services.

“This is how de-banking works,” Jeremy Tedesco, senior counsel at Alliance Defending Freedom (ADF), told The Epoch Times in a 2023 interview. “The bank closes the accounts, doesn’t give a clear reason, and cites some kind of risk toleration policy for the denial, under circumstances that look very suspiciously like it was because of your religious or political views.”

Lawmakers have responded with legislation aimed at combating financial discrimination. In March, Sen. Tim Scott (R-S.C.), for example, introduced the Fair Access to Banking Act (FIRM Act), which would bar federal regulators from penalizing or pressuring financial institutions based on reputational risk. A bipartisan House version was introduced the following month by Reps. Andy Barr (R-Ky.) and Ritchie Torres (D-N.Y.).

“For too long, unelected regulators have used the vague and subjective concept of reputational risk to push political ideology under the guise of bank supervision,” Barr said in a statement. “The FIRM Act restores neutrality and integrity to our financial regulatory system and protects the right of all Americans to access banking services without fear of unlawful discrimination.”

The Fed’s move aligns it with other banking regulators that have recently taken similar action. In March, the Office of the Comptroller of the Currency (OCC) said it would remove references to reputational risk from its manuals and guidance documents.

“The OCC has never used reputation risk as a catch-all justification for supervisory action,” the agency said in a statement. “Nonetheless, the OCC believes removing references to reputation risk will improve transparency and confidence in the supervisory process.”

Days later, Travis Hill, acting chairman of the Federal Deposit Insurance Corporation (FDIC), informed Congress that the agency would also eliminate reputational risk as a standalone factor, calling it a concept that “has been abused in the past” and adds “no value from a safety and soundness perspective.”

During an April speech at the American Bankers Association summit, Hill said the FDIC was drafting a rule that would explicitly bar supervisors from criticizing or taking action against banks based on reputational risk—particularly if it relates to clients’ political, religious, or social views.

“We are also exploring additional ideas to comprehensively put an end to debanking,” Hill said. “Overall, we are prioritizing ensuring our regulatory approach promotes a vibrant, growing economy, while at the same time promoting a safe, sound, and resilient banking system.”

Federal Reserve Chair Jerome Powell has also acknowledged the seriousness of the issue. Earlier this year, he told lawmakers during a congressional hearing that the Fed was taking a “fresh look” at reports of debanking, noting he had been “struck by the growing number of cases” where individuals or businesses were allegedly denied financial services.

Powell suggested that regulatory overreach and heightened risk aversion may be contributing factors and said the matter warranted closer examination.