Federal financial regulators are taking steps to dismantle reputational risk as a supervisory tool following the Senate Banking Committee's advancement of legislation led by Chairman Tim Scott. This move aims to remove reputational risk from bank supervision practices.
During the Financial Stability Oversight Council meeting on March 20, Secretary of the Department of the Treasury Scott Bessent supported the initiative to eliminate reputational risk as a criterion for bank supervision. In line with this, the Office of the Comptroller of the Currency (OCC) announced it would cease considering reputational risk in its regulatory oversight and will update its guidance documents to reflect this change. Similarly, the Federal Deposit Insurance Corporation plans to remove reputational risk from its financial institution supervisory processes.
"Debanking federally legal businesses and law-abiding citizens is un-American, but unfortunately, we’ve seen federal banking regulators abuse ‘reputational risk’ to carry out political agendas and force financial institutions to cut off access to financial services for Americans. Fortunately, the Trump administration has taken action to end the use of this subjective tool, and the FIRM Act – which advanced out of the Senate Banking Committee – will eliminate all references to reputational risk in regulatory supervision," stated Chairman Tim Scott.
BACKGROUND:
In an earlier legislative hearing, Chairman Scott listened to testimony from individuals who experienced debanking. He criticized the Biden administration's financial regulators for misusing their authority to influence financial institutions to deny services and pledged to find resolutions to stop this practice. During a committee hearing with Federal Reserve Chair Jerome Powell, Scott emphasized the issue, receiving a commitment from Powell to address it. Scott also engaged in discussions with Senate Banking Republicans and consumer bank leaders about debanking and related regulatory challenges.
Testimonies indicated that federal banking regulators were using the subjective notion of "reputational risk" to exert pressure based on perceived negative publicity, leading to politically motivated actions by agencies that were not directly related to banking safety or soundness.
Consequently, Chairman Scott and Republican committee members introduced legislation to prevent the use of reputational risk by banking agencies. The legislation has received endorsements from key industry organizations such as the American Bankers Association and others representing sectors affected by debanking.
Chairman Scott’s Financial Integrity and Regulation Management (FIRM) Act successfully advanced through the Senate Banking Committee during the first markup session of the 119th Congress.