Federal Reserve Drops Reputational Risk in Bank Oversight

The Federal Reserve has announced a significant policy shift, ending the use of 'reputational risk' in its oversight of banks, particularly in relation to cryptocurrency. This change aligns the Fed's approach with other federal banking agencies, such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), which have already discontinued the use of reputational risk in their bank supervision programs. The Fed has begun reviewing references to reputational risk across its supervisory materials and will replace them with more measurable financial risk criteria when appropriate.

While the Fed still expects banks to maintain strong risk management practices, the focus will now be on quantifiable threats to safety and soundness, rather than subjective or public perception-related risks. This move is seen as a recalibration of how the Fed enforces compliance and evaluates banking practices, following a pledge made by Fed Chair Jerome Powell earlier this year to revise oversight language that enabled regulators to monitor banks for “controversial comments or activities.”

The elimination of reputational risk from bank oversight is expected to benefit Republican lawmakers and crypto industry advocates. Critics have long argued that reputational risk allowed regulators to unfairly penalize banks working with politically sensitive clients or cryptocurrency firms—even when those clients posed no direct financial threat. By removing this broad and often ambiguous standard, the Fed may reduce barriers for banks serving nontraditional or controversial industries, while still holding them accountable for core financial stability.

The policy change could also open the door for lesser crypto regulation, allowing institutions to operate crypto projects and offerings more freely. The Securities and Exchange Commission (SEC) has also eased its regulation over crypto firms and the entire industry, further supporting the shift towards more lenient crypto regulations. This decision has been welcomed by banking institutions and the crypto community, with several banks now investing in crypto ETFs to offer to their customers. Many crypto enthusiasts have praised the Fed's decision, viewing it as a bullish move for the crypto industry. The American Bankers Association (ABA) has also applauded the Federal Reserve's announcement, stating that it welcomes the decision to join other bank regulators in discontinuing the use of reputational risk in bank supervision.

This policy change marks a significant shift in the Fed's approach to bank oversight, focusing more on financial risk and less on reputational considerations. The Fed will train examiners to ensure this change is implemented consistently across Board-supervised banks and will collaborate with other federal bank regulatory agencies to promote consistent practices. The move is expected to reduce barriers for banks serving nontraditional or controversial industries, while still holding them accountable for core financial stability.