Senate Banking Chair Proposes Bill to Remove Reputational Risk in Bank Assessments

Senate Banking Committee Chair Tim Scott has proposed a bill aimed at addressing concerns over the role of reputational risk in the regulation of financial institutions.

The Financial Integrity and Regulation Management Act (FIRMA) seeks to remove references to reputation risk as a factor when assessing the safety and soundness of banks.

Under the Federal Reserve’s definition, reputational risk is the potential for negative publicity about an institution's business practices, whether true or not, to lead to a loss of customers, expensive litigation or reduced revenue.

However, Scott argued that regulators have misused this concept to target businesses due to political bias. As a result, the bill aims to remove all references to reputational risk in regulatory oversight and

The legislation would prohibit federal agencies from creating new rules or guidance based on reputational risk and require them to report to Congress on their efforts to remove it as a supervisory measure.

The move responds to concerns from the crypto industry, which has accused government agencies of excluding them from the financial system.

Debanking, which is when banks close accounts they deem risky, often without notice or explanation, has become a significant issue, especially as the cryptocurrency sector claims it has been unfairly targeted. This issue was raised in recent congressional hearings, which revealed that regulators may have pressured banks to sever ties with crypto companies.

The proposal has received support from the American Bankers Association, the Blockchain Association, and the Bank Policy Institute.