The OCC has removed “reputational risk” from its handbooks and guidance and the FDIC is moving to do the same.
The OCC’s decision supports “the OCC’s mission and its supervisory objectives to ensure that banks have appropriate and strong risk management processes for their business activities, treat customers fairly, and comply with applicable laws and regulations,” the agency said, in announcing the move.
“The OCC’s examination process has always been rooted in ensuring appropriate risk management processes for bank activities, not casting judgment on how a particular activity may fare with public opinion,” said Acting Comptroller of the Currency Rodney E. Hood. “The OCC has never used reputation risk as a catch-all justification for supervisory action. Focusing future examination activities on more transparent risk areas improves public confidence in the OCC’s supervisory process and makes clear that the OCC has not and does not make business decisions for banks.”
Reputational Risk received attention during the Obama Administration’s Operation Choke Point, as banking regulators examined banks serving payday lenders, gun dealers, and other companies. However, more recently, there have been concerns expressed that reputational risk was considered by banking regulators evaluating institutions involved with crypto or digital assets.
In a letter to Rep. Dan Meuser, R-Pa., chairman of the House Financial Service’s Committee’s Oversight and Investigations Subcommittee, Acting FDIC Chairman Travis Hill addressed the reputational issue.
“I fully agree that banking regulators should not use ‘reputational risk’ as a basis for supervisory criticisms,” he wrote. He also wrote that a bank’s supervision is critically important and that most activities that could threaten a bank’s reputation would be found through traditional risk channels that supervisors already use.
“Meanwhile, ‘reputational risk’ has been abused in the past, and adds no value from a safety and soundness perspective as a standalone risk,” Hill said, in the letter, in which he also referenced agency work on digital assets. He said the agency has done an extensive review of regulations, guidance and other policies that address reputational risk.
“We are active working on a rulemaking to ensure supervisors do not criticize activities or actions on the basis of reputational risk, which we expect to issue in the near-future,” he wrote.
On Capitol Hill, Senate Banking Committee Chairman Sen. Tim Scott, R-S.C., has introduced S. 875, legislation that would prevent federal banking regulators from using reputational risk as a component in supervision. The legislation would require the banking agencies to report to Congress on their elimination of reputational risk as a component of their supervision of depository institutions.
The banking industry will be pleased to see the development. Items identified as exposing a bank to reputational risk have usually generated criticism on other grounds (for example, compliance risk, operational risk) and there was a real danger that evaluating reputational risk was penalizing an institution a second time for the same deficiency.
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