What They Are Saying: Experts Comment on Federal Reserve Board’s Announcement Removing Reputation Risk from Financial Supervisory Process

Federal Reserve Joins Other Financial Regulatory Agencies that have Eliminated Reputation Risk from Their Bank Supervision Process

This week, the Federal Reserve Board announced that it will no longer consider reputation risk in its supervision of banks, joining the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), which have both stated they will remove reputation risk from their review processes.

For years, federal regulators have weaponized vague reputation risk guidelines to encourage financial institutions to close — or “debank” — accounts for certain businesses and customers. Lacking clear, federal guidelines — and steep penalties for failure to comply with those arbitrary guidelines — financial institutions are incentivized by the regulatory environment to err on the side of caution, leading to the “debanking” of legitimate and legal customers and businesses based on these unelected regulators’ subjective judgement.

Many groups and national leaders have called for federal reforms to the regulatory system to address this issue of ambiguous federal overreach and highlight the need for consistent and transparent regulations.

Here’s what Americans for Free Markets (AFFM), policy experts and thought leaders are saying following the announcement from the Federal Reserve Board:

AFFM Advisor and Former U.S. Senator Pat Toomey (R-PA): “Banks alone should be able to make their own independent business judgement when considering reputation risk rather than unelected bureaucrats intent on advancing their own agendas. The Federal Reserve Board’s announcement builds on the momentum we’ve seen from other financial regulatory agencies like the OCC and FDIC to protect the free market from unnecessary government interference and promote access to financial services for hardworking families, businesses and communities.”

Rob Nichols, President and CEO, American Bankers Association: “We have long believed banks should be able to make business decisions based on prudent risk management and the free market, not the individual perspectives of regulators. This change will make the supervisory process more transparent and consistent while enabling banks to better meet the needs of their customers, clients and communities.”

Pete Sepp, President, National Taxpayers Union: “We applaud the Federal Reserve Board for taking the necessary action to remove the burdensome and opaque reputation risk rules from the financial regulatory process. Taxpayers will benefit from the decision to end this costly compliance task because banks can better focus on innovating for the economy and regulators can better focus on true safety and soundness matters.” 

Mario H. Lopez, President, Hispanic Leadership Fund: “Regulators use of opaque reputation risk criteria was harming consumer access to financial services by forcing financial institutions to adhere to changing, inconsistent regulations susceptible to federal regulators’ agendas. The Fed’s announcement, along with similar ones from the OCC and FDIC, empowers consumers and financial institutions through fairness and clarity in the regulatory system.” 

Kevin Fromer, President and CEO, Financial Services Forum: “Today’s announcement by the Federal Reserve is another important step toward focusing bank supervision on material financial risk. This, taken with the action by other financial regulators, will help to foster a more transparent and effective supervisory framework.”

Tim Doyle, President, Responsible Business Initiative and Senior Policy Advisory, Centerline Liberties: “The Federal Reserve Board’s announcement marks a significant step to remove politicized government interference in the financial sector. By removing subjective reputation risk concerns out of the supervisory process, the Fed is ensuring that access to financial services is regulated by well-defined oversight. Banks alone should be able to determine and evaluate risk without government input.” 

AFFM Executive Director John Wittman: “The Fed’s new guidance, along with the OCC and FDIC, provides much needed clarity and transparency to the banking supervisory process. To continue building on the momentum we’ve seen under the Trump administration, we encourage lawmakers to codify the removal of reputation risk as a component of supervising financial institutions into law to ensure this progress isn’t rolled back under future administrations.”

Read the Federal Reserve Board’s Announcement HERE.

Read the OCC’s announcement HERE.

Read the FDIC’s letter HERE.

Read more about commonsense, conservative solutions to address debanking concerns HERE.

Read more about what’s at stake on debanking HERE.