FDIC finalizes rule removing 'reputational risk' as basis for supervisory criticism; board adopts final rule

FDIC staff presented a final rule, to be issued jointly with the Office of the Comptroller of the Currency, that codifies the removal of "reputation risk" from the agency's supervisory framework. Shikha Kapoor (presenter) explained the agencies' view that using reputation risk as a basis for criticism increases subjectivity in supervision without adding material value to safety and soundness analyses. "Although a bank's reputation is important, most activities that could negatively impact an institution's reputation do so through traditional risk channels such as credit risk or market risk," the presentation said.

The final rule defines reputation risk to include an express reference to operational conditions and clarifies the agencies may not criticize or take adverse action against an institution on the basis of reputation risk. In a change from the proposal, the final rule expressly states the prohibition applies to actions by any individual at the agency, not just supervisory staff. The rule would also prohibit the agency from instructing or encouraging institutions to refrain from, terminate, or modify contracts or business relationships with third parties on the basis of reputational concerns tied to political, social, cultural, or religious views.

Staff told the board the final rule would not alter an institution's ability to manage commercial relationships consistent with safety, soundness and compliance with applicable law. Board members supporting the final rule said reputational risk is subjective and has been used in some cases as a pretext to restrict lawful businesses or individuals from access to banking services. The board voted to approve the final rule; the rule will take effect 60 days after publication in the Federal Register.