Fed eliminates reputation risk from bank examinations amid financial discrimination backlash

On June 23, 2025, the Federal Reserve announced a significant change in its bank examination policies by deciding to eliminate 'reputation risk' as a factor in its assessments. This decision aligns with ongoing efforts by Republican lawmakers and the Trump administration to tackle what they perceive as politically motivated financial discrimination, particularly in the context of debanking—that is, the denial of banking services based on subjective criteria related to a business's political or social affiliations. The Fed's statement indicated that this change is part of a broader review and revision of their supervisory materials, which will replace vague references with more detailed discussions on financial risks. The issue surrounding reputation risk has gained considerable attention, particularly from lawmakers and advocacy groups who argue that it has been used discriminatorily by banks against lawful businesses, especially against those involved in cryptocurrency, religious organizations, or certain political groups. Critics assert that invoking reputation risk often camouflages discriminatory practices, leading to rising concerns about fair access to financial services. The bipartisan response to these concerns has included legislation aimed at ensuring fair access to banking, such as the introduction of the Fair Access to Banking Act (FIRM Act) by Senator Tim Scott and a House version introduced by Representatives Andy Barr and Ritchie Torres. These legislative efforts aim to prevent regulators from penalizing financial institutions based on reputational risk. This shift is not unique to the Federal Reserve; other banking regulators have similarly re-evaluated their stance on reputation risk. In March 2025, for example, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) announced plans to remove references to reputation risk from their guidance documents, emphasizing the need for greater transparency and a focus on tangible financial risk factors. Travis Hill, the acting chairman of the FDIC, has been vocal about the need to end the practice of debanking, indicating that the agency is working on rules that would prevent regulators from acting against banks for reputation-related issues stemming from clients' personal beliefs. With these developments, the Federal Reserve is acknowledging the serious nature of the issues surrounding debanking. Chair Jerome Powell has recognized a growing number of cases where services were reportedly denied, which reflects the urgent need for a fresh assessment of these practices. The commitment to ensuring safety, soundness, and compliance in banking has not changed, but the approach to evaluating risks has evolved. The end of incorporating reputation risk marks a significant shift in regulatory philosophy, aiming to uphold the integrity of the banking system while protecting customers from discriminatory practices.