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On February 23, the Federal Reserve Board announced a Notice of Proposed Rulemaking requesting comments on a proposal to formally remove “reputation risk” from its supervisory framework and prohibit examiners from encouraging banks to deny financial products or services based on constitutionally protected political or religious beliefs or involvement in lawful but politically disfavored business activities.
The proposal follows the Federal Reserve's June 2025 announcement that reputation risk would no longer be used as a component of bank examination programs (previously discussed here). According to the Federal Reserve, the proposed rule would formalize that policy change by incorporating it into the agency's regulations and supervisory framework.
Historically, the Federal Reserve defined reputation risk as the potential that negative publicity regarding a banking organization's business practices could result in a decline in customers or revenue, or lead to litigation. Reputation risk emerged as a supervisory concept in the 1990s and later became embedded in various supervisory materials, including risk-focused examination guidance.
Under the proposal, the Federal Reserve would be prohibited from using reputation risk in supervisory examinations, as well as in manuals, guidance documents, and examiner training. The rule would also seek to limit debanking, restricting the agency from encouraging banks to restrict services to individuals or businesses based on constitutionally protected beliefs, speech, associations, or participation in lawful activities perceived to create reputational concerns.
Putting It Into Practice: If finalized, the rule would further align the supervisory frameworks of the federal prudential regulators (previously discussed here and here) by embedding the removal of reputation risk directly into the Federal Reserve's regulations and examination guidance. Institutions should review internal risk management and customer relationship policies to ensure they remain aligned with evolving supervisory guidance.
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