Senator Scott Introduces Bill to End Reputational Risk in Bank Supervision

Senator Tim Scott, the ranking Republican on the Senate Banking Committee, has introduced a bill aimed at preventing regulators from using reputational risk as a factor in supervising banks. The Financial Integrity and Regulation Management Act seeks to address concerns that financial institutions are avoiding certain customers due to political pressure or public perception. This legislative move is a response to growing concerns over “debanking,” a term used to describe financial institutions cutting ties with businesses or individuals based on perceived risks to their reputation.

Crypto companies have been vocal about the issue, arguing that federal regulators have used it as a pretext to limit their access to banking services. The bill would eliminate all references to reputational risk in regulatory oversight, preventing agencies from using it to justify supervising or penalizing banks. Senator Scott argued that regulators have exploited this concept to push a political agenda against certain legally operating businesses.

Eleven Republican senators have supported the bill, including Mike Crapo, Cynthia Lummis, Katie Britt, and Bernie Moreno. Additionally, industry groups such as the American Bankers Association, the Blockchain Association, and the Bank Policy Institute have backed the proposal. Crypto firms have welcomed the effort, as they have frequently cited regulatory hostility as a barrier to maintaining banking relationships in the U.S.

Scott’s bill follows another measure co-sponsored by Sen. Kevin Cramer of North Dakota, which would require banks to do business with all legally compliant and creditworthy customers. While that proposal has faced resistance, Scott’s legislation may have a clearer path forward, as it focuses on removing reputational risk rather than mandating specific banking practices.

The Federal Reserve currently defines reputational risk as the potential for negative publicity, whether true or not, to impact a bank’s customer base, revenue, or legal standing. Scott’s proposal seeks to eliminate this definition, arguing that it has been misused to target certain industries and businesses.

The introduction of this bill comes at a time when the U.S. Senate Banking Committee is gearing up for a pivotal hearing on crypto regulations. With a new leadership shift, the committee is set to hold a crucial hearing on crypto regulations, with industry representatives and legal experts offering insights on regulatory frameworks that could foster innovation while ensuring market stability.

Discussions during the hearing will focus on market structure, stablecoin regulations, and the possibility of a strategic Bitcoin reserve. Lawmakers aim to balance oversight and innovation, positioning the