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FDIC board approves notice to bar regulators from using 'reputation risk' as basis for criticism
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Summary
The FDIC board authorized an NPR that would codify the agency’s removal of 'reputation risk' from its supervisory framework and prohibit agencies from criticizing or taking adverse action against an institution based on reputation‑related public perception unrelated to safety and soundness; board authorized a 60‑day comment period.
The Federal Deposit Insurance Corporation board voted to publish a notice of proposed rulemaking that would prohibit federal banking agencies from criticizing or taking adverse action against a supervised institution on the basis of “reputation risk.”
FDIC staff told the board the proposed rule would define reputation risk as the risk that an action or activity of an institution could negatively affect public perception for reasons unrelated to the current or future financial or operational condition of the institution. The rule would bar agencies from formally or informally criticizing an institution or encouraging it to terminate, modify, or enter into business relationships on that basis. The notice would request a 60‑day comment period.
Acting chairman statement: “Although staff recognizes the importance of a bank’s reputation, most activities that could negatively impact an institution’s reputation affect safety and soundness through traditional risk channels, such as credit risk, liquidity risk, or market risk. Reputation risk as a stand‑alone risk adds no value from a safety and soundness perspective and is ripe for abuse.”
Staff said the proposal is intended to respond to concerns that use of reputation risk can be a pretext to restrict access to financial services on the basis of political or religious beliefs or lawful business activities. The rule would not prevent institutions from making business decisions consistent with safety, soundness and applicable law.
The board moved, seconded and adopted the resolution authorizing publication of the notice. Director Jonathan Gould spoke in support and the acting chairman announced the motion adopted. The board set a 60‑day comment period.
