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The FDIC and the OCC have approved the joint publication of a Notice of Proposed Rulemaking that would codify the removal of reputational risk from their supervisory programs.
"Examining for reputation risk can result in agency examiners implicitly or explicitly encouraging institutions to restrict access to banking services on the basis of examiners' personal views of a group's or individual's political, social, cultural, or religious views or beliefs, constitutionally protected speech, or politically disfavored but lawful business activities," the FDIC staff said, in a memo.
The proposed rule "would define 'reputational risk' as the risk that an action or activity, or combination of actions or activities, or lack of actions or activities, of an institution or its employees could negatively impact public perception of the institution for reasons unrelated to the current or future financial or operational condition of the institution."
Without clear standards, the FDIC staff said the agencies' supervision for reputation risk has been inconsistent and at times, has not been data-driven. On the other hand, risks such as credit and liquidity risks are more concrete and measurable and allow examiners to more objectively assess a bank's financial condition.
"The proposed rule would not alter or affect the ability of an institution to make business decisions regarding its customers or third-party arrangements and to manage them effectively, consistent with safety and soundness and compliance with applicable laws," the staff said, in the memo.
The moves are based on an Executive Order that President Trump signed on August 7. That order, "Guaranteeing Fair Banking for All Americans," prohibits financial institutions of any size from denying services to individuals or businesses based on political or religious beliefs, orientation, or lawful industry involvement.
The Executive Order directed banking agencies to adopt policies to ensure that financial institutions do not use reputational risk as a basis for restricting access to banking services.
Several financial regulators have taken action to delete reputational risk from their policies. The OCC removed references to reputation risk from its handbooks and guidance documents. The agency said at the time that it also was developing a rule that will delete reputational risk references from its regulations. The NPRM issued jointly with the FDIC would codify that decision, if it is adopted.
In addition, the SBA sent letters to its network of more than 5,000 lenders instructing them to end what the Trump Administration said is politicized or unlawful debanking.
Most recently, the NCUA took action to remove reputational risk from its examination materials. "NCUA employees will no longer base supervisory concerns on reputation risk, nor will they refer to or engage in discussions about reputation risk as a part of examinations and supervision contacts of a credit union or Credit Union Service Organization," NCUA Chairman Kyle Hauptman wrote, in a letter to credit unions.
He said that the agency is reviewing and updating regulations, manuals, guidance and training materials to remove references to reputational risk. He added that until then, his letter supersedes any prior direction or requirements related to reputational risk.
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