Jakub Sobkowicz
Associate Editor
Loyola University Chicago School of Law, JD 2027
On March 6, 2025, the Chairman of the United States Senate Committee on Banking, Housing, and Urban Affairs, Senator Tim Scott, introduced a bill designed to eliminate reputational risk as a component of regulatory supervision in banking. The Financial Integrity and Regulation Management Act, or FIRM Act, is the latest edition in the Senate’s efforts to reduce the potential influence of banking regulators in perpetuating debanking schemes of various industries. The bill has received praise and support from many leaders and industry groups in the banking industry including a letter of support from a coalition of 26 state financial officers and comments in favor of the bill submitted by the American Bankers Association (ABA). On March 13, 2025, the Senate Banking Committee voted in favor of sending the bill to the Senate to begin congressional voting. While it remains debatable if reputational risk is being misused to politically influence the types of clients that banks service, it is clear that reputational risk in regulatory exams is an unnecessary extension of strategic risk that should be removed from examinations to close the door to any possibilities of political misuse.
How regulatory supervision occurs in banking
Most banks are regulated by a combination of regulatory agencies including the Federal Reserve Board (Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). Among other responsibilities, these agencies are responsible for the regulatory supervision of banks through examination with the authority to impose enforcement actions on the banks when the examinations result in findings. The OCC, for example, “evaluates bank activities and management processes to ensure that banks operate in a safe and sound manner, do not take excessive risks, and comply with laws and regulations”. During examinations, the OCC uses a Risk Assessment System (RAS), which is a method of documenting conclusions about eight risk categories: credit, interest rate, liquidity, price, operational, compliance, strategic, and reputation. The final risk category, reputation, is the subject of the FIRM Act.
Reputational risk as defined by regulators
Reputational risk is a broad term that varies slightly depending on the source. The OCC considers it to be the risk to current or projected financial condition and resilience arising from negative public opinion. The FDIC maintains a slightly different definition by removing the reference to financial condition and simply viewing reputation risk as the risk arising from negative public opinion. Finally, the Fed has the most detailed description of reputational risk, defining it as the potential that negative publicity will cause a decline in the customer base, costly litigation, or revenue reductions. Clearly, the primary focus of reputation risk is based on monitoring the potential for negative public opinion. Each regulating agency may use its own discretion in defining how negative public opinion could impact the banking institution, and therefore the banking industry as a whole. Notably, the FIRM Act uses the more thorough and all-encompassing definition created by the Fed.
How reputational risk may enable political debanking
While on the surface reputational risk appears to be a straightforward risk category that is seemingly uncontroversial, critics of the inclusion of reputational risk in regulatory supervision point to a history of regulators using this risk category to influence banks to debank industries that the regulators disagree with politically. Regulators have historically advised banks that certain industries or groups pose more reputation risk, therefore leading to negative examination results in certain political or social climates. For example, the National Rifle Association posed more reputation risk following a Florida school shooting. Additionally, banking relationships with payday lenders had increased reputation risk during Operation Choke Point. Further, reputation risk increased when lending to oil and gas companies in the wake of the environmental movement. These examples illustrate how banking advocates fear that the use of reputation risk in regulatory supervision creates a pathway for regulators to unfairly influence the actions of the banks for political or social purposes.
Reputational risk should not be a factor in regulatory supervision
Notwithstanding whether or not reputational risk is truly a tool for regulators to influence the actions of banks or if the claims of political misuse are simply conspiracy, reputational risk should be removed from regulatory supervision as a matter of independent business decision making. The purpose of regulatory supervision over risk categories is to promote public wellbeing by ensuring that banks are maintaining safety and soundness to support the economy. However, the government’s interest in ensuring that banks make sound strategic decisions and conduct thorough due diligence when implementing business strategy is represented within the strategic risk category, which is also used in regulatory examinations. Reputational risk is an extension of strategic risk that strays too far from the interest of the government and should be left as an internal risk category for banks to use in their independent decision making on how to conduct business.