The Federal Reserve announced Monday it will stop checking banks for “reputational risk” when doing its regular reviews. This means it will no longer judge banks based on how public opinion or bad press could harm their image.
The change applies across all banks under the Fed’s watch, and examiners will now only look at risks that directly affect money, operations, or laws. “The Board has started the process of reviewing and removing references to reputation and reputational risk,” the Fed said in a statement.
Reputational risk meant banks could get flagged by regulators even if they followed the law, just because something they did might upset the public or attract negative media. For years, banks complained that this rule was too vague and unfair. Now, the Fed’s new plan will remove all mentions of this risk from official manuals and documents used during inspections.
The Fed also said it will retrain supervisors so that the new rule is applied the same way for every bank. It added that the move does not mean banks can be careless. They still need strong systems to manage risk and follow the rules.
But it’s now up to the banks to decide how much public image matters in their day-to-day work. The Fed said this change “is not intended to impact whether and how Board-supervised banks use the concept of reputational risk in their own risk management practices.”
This puts the Fed in line with two other big regulators, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), who have already made the same change.
This is good news, especially for crypto firms. Some banks in the U.S have always distanced themselves from cryptocurrency because of how it might “look” to the public or regulators.
There was an incident earlier in 2023 when two crypto-friendly banks, Silvergate and Signature, collapsed because they struggled to find new banking partners amid the turmoil that saw major banks lose close to $200 billion in a week. At the time, banks that were previously open to client from the crypto space turned their backs.
Now, with this new approach, banks may feel safer doing business with legal crypto companies, as long as there’s no financial danger. According to the Fed officials, “focus on the money risks, not the headlines.”
Also Read: Crypto Market Dips as Iran-US Tensions Rise: Bitcoin Falls Below $100K
