Federal Reserve Drops Reputational Risk From Bank Exams

The Federal Reserve has made a significant change to its bank examination criteria by removing "reputational risk" from its guidelines. This decision, announced on Monday, aims to shift the focus of supervisors away from vague metrics and towards clear-cut financial risks such as liquidity, credit exposure, and operational systems. The central bank's official statement confirmed that all references to reputational risk will be deleted from its supervision manuals and guidance documents, meaning banks will no longer be penalized based on public perception, even if the activities are legal and profitable.

This move comes after years of complaints from banking executives who argued that reputational reviews allowed examiners to block deals based on personal bias or political pressure. Much of the criticism centered around crypto, where partnerships were often shut down due to regulatory disapproval of the optics. The Fed's decision aligns it with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, who had already moved away from the reputational test. The announcement clarified that banks are still expected to maintain strong internal controls but can now decide for themselves whether public perception matters in specific business deals.

This decision is occurring amidst significant political pressure on the central bank. President Donald Trump has escalated his public attacks on the Federal Reserve and Chair Jerome Powell, calling him a “Total and Complete Moron” in a recent social media post. The insults followed a private Oval Office meeting where Trump demanded an aggressive cut to interest rates, from the current level of 4.3% down to 1–2%, to lower the cost of financing US debt. He warned that if Powell doesn’t act, he’ll get blamed for any downturn. Powell, in response, stated that the Fed's goal is a good, solid, American economy. He is scheduled to appear before Congress for a monetary policy hearing, where lawmakers are expected to question both the reputational rule change and Trump’s interference.

Trump’s camp is also applying pressure through other officials. Commerce Secretary Howard Lutnick claimed this week that inflation fears from tariffs are overblown, backing Trump’s demand for lower rates. Inside the Fed itself, a split is opening up. Of all the officials who’ve spoken since last week’s meeting, only two have shown any interest in a July rate cut, and both were appointed by Trump. One of them, Michelle Bowman, said on Monday that she’s more concerned about rising unemployment than inflation. That’s a major change for someone who’s usually laser-focused on price stability.

Powell’s term ends in less than a year, but removing him outright won’t be easy. The Supreme Court last month refused Trump’s emergency request to fire federal commissioners at will, signaling that Powell is legally protected—at least for now. That’s forced Trump to consider a different move: announcing Powell’s successor before the term is up. That early announcement would install a “shadow chair” to undermine Powell’s authority in real time. But that plan has its own risks. A replacement seen as too loyal to Trump could lose credibility with markets and face resistance from other Fed officials. If that person defends Powell’s current policies, they risk being tossed aside before taking office. If they attack Powell publicly, they lose the support of the people they’ll need once they’re in charge.

For now, Trump seems content to keep the pressure on. He wants the public to know who to blame if things go south. And the Federal Reserve, while finally giving the banking sector relief on crypto compliance, is caught in a standoff between institutional stability and a president who doesn’t mind dragging the fight into full view.