The Retreat from Reputational Risk in Bank Supervision: A New Era of Transparency

The Retreat from Reputational Risk in Bank Supervision: A New Era of Transparency

An article by Ballard Spahr highlights a major change for financial institutions, as both the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) are seeking to remove “reputational risk” from their supervisory frameworks.

This change signals a renewed focus on tangible, measurable risks, aligning with broader efforts to ensure that bank supervision prioritizes safety, soundness, and compliance over public opinion. For risk management professionals, this evolution offers greater clarity around examination criteria and reduces concerns over subjective or duplicative regulatory scrutiny.

The OCC formally announced the removal of reputational risk from its handbooks and guidance, affirming that its supervisory mission is centered on verifying robust risk management practices, customer fairness, and legal compliance, not weighing the public image of a bank’s business activities. 

The article cites Acting Comptroller of the Currency Rodney E. Hood, who emphasized that the OCC’s examination approach has never relied on public opinion as a justification for action, and that the updated focus will strengthen public trust in the supervisory process. This move also addresses lingering concerns dating back to Operation Choke Point under the Obama administration, when reputational risk was scrutinized in relation to banks serving specific controversial industries.

Similarly, Acting FDIC Chairman Travis Hill expressed his agreement that reputational risk should not serve as a basis for supervisory criticism. In a letter to Congress, Hill noted that most activities that could threaten a bank’s reputation would already be captured under existing risk categories. He also highlighted forthcoming rulemaking to codify this approach and prevent reputational risk from being misapplied in supervision, particularly in areas like digital assets. 

Meanwhile, legislative efforts such as Senator Tim Scott’s S. 875 bill would formalize the removal of reputational risk considerations across federal banking oversight.

Institutions can expect supervisory examinations to concentrate more directly on core risk categories such as operational, compliance, and financial risks, without the added ambiguity of reputational concerns. This change will likely enhance regulatory consistency, reduce the risk of double penalties, and create a clearer, more objective supervisory environment, ultimately allowing banks better to align their risk management frameworks with tangible supervisory expectations.