In a significant shift, each of the country's three federal bank regulatory agencies have announced they will no longer consider reputational risk as a stand-alone supervisory category. These developments, introduced within the first six months of the Trump administration, reflect broader deregulatory priorities and a decisive reorientation of how federal agencies intend to assess safety and soundness in the banking system.
The Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have publicly committed to removing reputational risk from their supervisory toolkits. While this change narrows the scope of federal oversight in some respects, it also raises practical questions about regulatory consistency, reputational management and the evolving political landscape surrounding financial services.
Federal Agencies Retreat From Reputational Risk
On June 23, the Fed announced that reputational risk "will no longer be a component of examination programs in its supervision of banks," and that it is in the process of removing references to reputational risk from its exam guidance materials. The board also announced that its bank examiners would be trained to ensure the change is applied consistently across supervised financial institutions.
The Fed's announcement follows similar moves by its fellow federal bank regulatory agencies. On March 20, acting Comptroller of the Currency Rodney Hood announced that the OCC would eliminate all references to reputational risk from its supervisory guidance and examination procedures. In his remarks, Hood emphasized a return to transparent and objective risk categories and stated that the OCC "has not and does not make business decisions for banks."
Four days later, acting FDIC Chairman Travis Hill affirmed that the FDIC would follow suit. In a letter to the chairman of the House Financial Services Subcommittee on Oversight and Investigations, Hill wrote that the agency would "eradicate [reputational risk] from our regulatory approach," citing past abuses and the lack of any material value to safety and soundness when reputational risk is treated as an independent supervisory concern.
All three regulators indicated that banks are still expected to remain diligent in their risk management practices, including by meeting capital, asset quality, management, earnings and liquidity standards. But future supervisory activity will focus on these core areas of financial health rather than perceived reputational exposure.
A Response to Calls for Debanking
The retreat from reputational risk reflects a larger response to sustained political and industry pressure related to so-called debanking. The term describes the closure of customer accounts by financial institutions based on concerns that the customer may expose the bank to reputational harm. While banks have denied engaging in debanking for political or ideological reasons, a number of companies, such as cryptocurrency giant Coinbase and firearm manufacturer Sturm Ruger & Co., have claimed that they or others in their industries were denied banking services because of the reputational risk they were perceived to pose.
Ruger claimed that Wells Fargo terminated its credit facility in 2021 based on discrimination against gun manufacturers in violation of Texas state law, and Coinbase is backing a 2024 lawsuit — History Associates Incorporated v. FDIC in the U.S. District Court for the District of Columbia — against the FDIC over so-called pause letters sent to banks, alleging that the FDIC engaged in a coordinated effort to debank cryptocurrency firms in a manner similar to the infamous Operation Choke Point initiative under the Obama administration.
Against this backdrop of continued debate on the scope of debanking, the regulatory agencies' announcements came shortly after Senate Banking Committee Chair Tim Scott, R-S.C., introduced the Financial Integrity and Regulation Management Act, or FIRM Act, in the Senate. The proposed legislation and its corresponding U.S. House bill would prohibit the use of reputational risk in financial regulatory supervision and has received support from industry stakeholders who argue that reputational risk allows for politically motivated enforcement actions and undermines access to financial services.
Although the Fed, OCC and FDIC acted independently of the proposed legislation, their decisions appear to preempt the FIRM Act's core provisions by taking similar positions through administrative action.
What Reputational Risk Meant for Banks
For years, reputational risk has been defined broadly as the risk to a bank's earnings or capital arising from negative public opinion. Its scope encompassed many areas, including customer complaints, litigation, ethical lapses and controversial business partnerships. While never formally tied to enforcement authority, reputational risk could nevertheless influence how regulators interpreted a bank's overall risk posture and could affect capital adequacy, asset quality, management, earnings, liquidity and sensitivity ratings; compliance expectations; and the outcomes of examinations.
The inherent subjectivity of reputational risk has drawn criticism from both legal scholars and industry advocates. Critics argue that reputational risk allowed for discretionary decision-making based on regulators' views of what constitutes reputational harm, often without clear or consistent standards. That discretion, in turn, created uncertainty and potential bias in supervisory outcomes.
By removing reputational risk from supervisory materials, the Fed, OCC and FDIC aim to bring greater clarity and objectivity to the examination process.
Practical Implications for Financial Institutions
Although the federal rollback of reputational risk may simplify certain compliance practices, it does not eliminate all associated concerns.
First, reputational risk remains relevant to banks' business operations, even if it is no longer a regulatory metric. Public controversies, litigation or associations with high-risk clients can still affect customer trust, investor confidence and media exposure. Banks will continue to manage reputational issues from a business continuity and customer relations perspective.
Second, state regulators may fill the gap left by their federal counterparts. Several state banking departments have adopted more expansive interpretations of risk, including reputational and social responsibility concerns. For example, states such as New York and California have previously issued guidance emphasizing reputational factors related to environmental, social and governance in the evaluation of bank practices.
Given the potential regulatory divergence between federal and state regulators, and even among federal agencies, banks should continue to exercise caution when making decisions about customer relationships, particularly in politically sensitive sectors. Institutions should also continue to evaluate their risk management programs across all traditional areas and ensure that their internal controls are designed to identify and mitigate risks that may have reputational components, even if they are not classified that way for supervisory purposes.
Looking Ahead
The decision to eliminate reputational risk as a stand-alone supervisory concern is part of a broader deregulatory trend that appears to be taking shape under the current administration. In addition to curtailing subjective regulatory discretion, agencies have signaled support for financial innovation, expanded access to services, reduced compliance burdens in sectors such as fintech and digital assets, and reduced reliance on subregulatory guidance in enforcement proceedings.
Going forward, financial institutions should:
- Monitor changes to examination procedures and guidance issued by the Fed, OCC, FDIC and other regulators;
- Track the progress of legislation such as the FIRM Act that could codify current regulatory policy shifts;
- Prepare for potential state-level scrutiny that could incorporate reputational factors even as federal regulators step back; and
- Remain focused on traditional risk categories that remain central to supervisory outcomes.
While reputational risk may be receding from the federal regulatory agenda, reputational harm remains a real concern for financial institutions. The removal of reputational risk as a supervisory category provides some regulatory clarity but also places a greater burden on banks to navigate public-facing risks without direct regulatory guidance.
Conclusion
The Fed, OCC and FDIC's decisions to eliminate reputational risk as an independent category of supervisory concern mark a clear break from past practice. These moves respond to criticism from lawmakers and industry stakeholders who have questioned whether regulators should play a role in shaping or evaluating the reputational exposure of private companies. Although the changes may reduce uncertainty in the supervisory process, financial institutions must continue to manage reputational considerations as a matter of business strategy and legal risk. At the same time, banks should prepare for a changing compliance landscape as state and federal policies continue to evolve.
Originally published by Law360 on July 17, 2025, and reprinted here with permission.
