Fed unveils plan on eliminating reputation risk in bank exam

[WASHINGTON] The Federal Reserve unveiled a new proposal that further targets how examiners scrutinise banks’ risk after US President Donald Trump moved to rein in what he sees as the closing of customer accounts for unfair reasons.

The new plan, which is subject to public consultation, would seek to explicitly prohibit examiners from “penalising or prohibiting” a firm from banking a customer engaged in legal activity. Instead, examinations should prioritise risks that threaten bank safety and soundness.

“We have heard troubling cases of debanking – where supervisors use concerns about reputation risk to pressure financial institutions to debank customers because of their political views, religious beliefs, or involvement in disfavoured but lawful businesses,” Fed vice-chair for supervision Michelle Bowman said.

The Fed had announced last year it would no longer consider reputation risk as part of its bank exams. The central bank said on Monday the new proposal would codify that move.

The measure forms part of a larger effort to eliminate debanking, or the practice of depriving some individuals and businesses of banking services. Consumer advocates say there is little evidence to show the issue is widespread, but critics have argued that some bank examiners pushed lenders to stop doing business with politically sensitive clients, even when they purportedly posed no risk to the bank’s safety and soundness.

The Fed’s plan mirrors an earlier measure by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation seeking to codify a ban on the use of reputation risk. Regulators have said that monitoring traditional factors such as credit and market risk is the best way to prevent harm to banks’ reputations. BLOOMBERG