The Federal Reserve Board announced Monday it will eliminate reputational risk from its bank examination programs, completing a regulatory overhaul that began earlier this year as banking agencies respond to accusations they used the concept to deny services to legal businesses.
The central bank joins the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. in abandoning reputational risk as a supervisory tool, marking the end of a practice that critics say enabled "Operation Choke Point" tactics against industries including cryptocurrency, firearms, and payday lending.
The Fed's move caps a rapid transformation of bank supervision that accelerated in March when the OCC announced it would no longer examine institutions for reputational risk1. The FDIC followed weeks later, with Acting Chairman Travis Hill writing that reputational risk "has been abused in the past, and adds no value from a safety and soundness perspective"2.
All three agencies are now removing references to reputational risk from examination manuals and training materials. The Fed said it will work with other regulators "to promote consistent practices" while maintaining expectations for banks to manage traditional financial risks3.
The regulatory shift follows mounting congressional pressure, particularly from Senate Banking Committee Chairman Tim Scott, whose Financial Integrity and Regulation Management (FIRM) Act passed committee in March on party lines1. The legislation would prohibit federal agencies from using reputational risk in supervision and examinations.
"Federal banking agencies use reputational risk to prevent … depository institutions from providing financial services to industries that the agencies disfavor," Scott said when introducing the bill2.
The concept gained prominence during Operation Choke Point, a Obama-era Justice Department initiative that critics say pressured banks to cut ties with gun dealers, payday lenders, and other legal businesses deemed high-risk12. A 2014 House investigation concluded the program "inappropriately demands that bankers act as the moral arbiters and policemen of the commercial world"2.
More recently, cryptocurrency firms have accused regulators of using reputational risk to deny banking services, leading to what industry observers called "Operation Choke Point 2.0"3. Hill acknowledged the FDIC had been "closed for business" for digital asset institutions and promised new guidance for banks seeking to engage with the sector3.
"This marks meaningful progress in refocusing oversight on material financial risk," said Bank Policy Institute CEO Greg Baer4.
