‘Reputational risk’ dropped from exam component by Fed, joining OCC and, ultimately, FDIC

“Reputational risk” will no longer be part of bank examination programs by another federal banking regulator, it said Monday, becoming the second this year to make the change.

The Federal Reserve, in a release, said that – because of removing reputational risk as a component of exam programs for banks – it has started reviewing and removing references to reputation and reputational risk from its supervisory materials, including examination manuals, and, where appropriate, replacing those references with more specific discussions of financial risk.

“The Board will train examiners to help ensure this change is implemented consistently across Board-supervised banks and will work with the other federal bank regulatory agencies to promote consistent practices, as necessary,” the Fed said.

The Fed has now joined the Office of the Comptroller of the Currency (OCC) in removing the reputation component from its exam process.

In March, the national bank regulator said it was removing reputation risk from its exam booklets and guidance, and that examiners had also been told they should no longer examine for reputation risk.

“The OCC has never used reputation risk as a catch-all justification for supervisory action,” the agency said in a bulletin issued March 21. “Rather, the OCC has focused primarily on the risks to a bank’s current or projected financial condition and resilience arising from negative public opinion.”

In April, acting chairman of the Federal Deposit Insurance Corp. (FDIC) Board Travis Hill said his agency was preparing a rulemaking related to reputational risk that would prohibit FDIC supervisors from criticizing or taking adverse action against institutions based on reputational risk, “and requiring, instructing, or encouraging institutions to close, modify, or refrain from offering accounts on the basis of political, social, cultural, or religious views.”

In its announcement Monday, the Fed said its change “does not alter the Board’s expectation that banks maintain strong risk management to ensure safety and soundness and compliance with law and regulation nor is it intended to impact whether and how Board-supervised banks use the concept of reputational risk in their own risk management practices.”

Federal Reserve Board announces that reputational risk will no longer be a component of examination programs in its supervision of banks