Fed ends use of 'reputational risk' in exams and signals warmer tone on bank crypto engagement
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Summary
The Federal Reserve, at Vice Chair Mickey Bowman's leadership, has moved to remove 'reputational risk' as a component of bank examinations. Chairman Powell told the House committee the change addresses concerns about politicized supervisory pressure that deterred banks from serving certain customers and that the Fed is open to banks providing
Lawmakers and Fed officials announced a change in supervisory practice: the Federal Reserve has removed "reputational risk" as an exam factor and is narrowing prior guidance that discouraged bank involvement in crypto-related activities.
Representative Stile (chair of the subcommittee on digital assets, financial technology, and artificial intelligence) described reputational risk as a catch-all that had the effect of politicizing exams and discouraging banks from serving lawful customers and digital-asset companies. Powell said he was "not aware of any new information" prompting the action but that the Fed began to treat the issue as a problem in 2024 after reports of debanking and political bias, and the agency concluded change was warranted.
Powell told the committee the Fed's view is that "banks get to decide who their customers are" and banks are allowed to provide banking services to crypto firms as long as they do so in ways that protect safety and soundness. He said the recent decision to wind down the Fed's Novel Activities supervision program and withdraw deterrent statements reflects an evolving, more permissive tone and that the Fed expects to see more engagement over time.
Members pressed whether front-line examiners will align with the new direction. Powell said Vice Chair Bowman, who has supervision experience, is well-positioned to engage supervisors and align practices. Several members also asked whether the Fed will issue additional rule changes to define "unsafe and unsound" more objectively; Powell said he favors the substance of those ideas and pointed to Bowman's leadership in sequencing supervisory reforms.
On stablecoins and payment stablecoins, Powell said he supports the movement of legislation in both chambers creating a regulatory framework but deferred detailed accounting/SEC questions and said he would respond in writing. He added the Fed does not seek authority to create or hold crypto reserves and would not buy Bitcoin or similar assets.