FDIC Acting Chair Moves to Eliminate "Reputational Risk" in Bank Examinations

FDIC Acting Chair Travis Hill said that the agency will no longer use "reputational risk" as a basis for supervisory criticisms, calling the concept unnecessary and prone to abuse.

In a letter to Representative Dan Meuser (R-PA), Chair of the House Subcommittee on Oversight and Investigations, Mr. Hill confirmed that the FDIC is actively reviewing and removing mentions of reputational risk from its regulations, guidance and examination manuals. He further stated that the agency is working on a formal rulemaking to prevent supervisors from citing reputational risk as grounds for criticizing a bank's activities.

Mr. Hill said the FDIC and banking regulators need a reformed supervisory approach "to focus more on core financial risks and less on process, administration, and documentation, and to apply clear and consistent standards to supervised institutions." He said this work will be a multi-year process which will include (i) "a shift in tone and emphasis from leadership," (ii) "a shift in how we train examiners" and (iii) "policy changes to the CAMELS ratings and FDIC examination manual." 

Mr. Hill also raised concerns about transparency in bank account closures, suggesting that financial institutions should be able to provide customers with explanations when closing accounts. However, he acknowledged that existing laws, such as the Bank Secrecy Act, impose limitations on what banks can disclose, particularly regarding suspicious activity reports.

Mr. Hill also outlined a shift in the FDIC's stance on digital assets, stating that the agency had previously been "closed for business" when it came to blockchain and distributed ledger technology. He reported that the FDIC is coordinating with the Department of the Treasury and the President's Working Group on Digital Asset Markets as it revises its policy.