Banking Regulators Propose Rule to End Use of "Reputation Risk" in Oversight

The Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") issued a proposed rulemaking to eliminate "reputation risk" as a factor in evaluating financial institutions under their supervisory programs.

In March 2025, the OCC issued Bulletin 2025-4 directing examiners to stop assessing reputation risk and to remove related references from its manuals. The regulators stated that the proposed rule would make this change permanent and legally binding for both agencies.

Under the proposal, examiners would be prohibited from directing or pressuring institutions to terminate, modify, or avoid business relationships because of perceived reputational concerns. The proposal would also protect lawful activities by expressly forbidding the regulators from influencing banks’ business decisions based on political, social, cultural, or religious views, constitutionally protected speech, or involvement in politically disfavored but lawful industries.

The regulators argued that the practice of using reputation risk as a factor in supervisory programs (i) adds unnecessary subjectivity without improving safety and soundness oversight; (ii) is not backed up by evidence that it prevents losses or enhances performance (as harm typically arises from measurable risks like credit or liquidity); (iii) invites political or other biases into supervision; (iv) diverts resources from addressing tangible financial risks; and (v) may harm institutions by discouraging sound and profitable business relationships.