Federal Reserve Removes Reputational Risk From Bank Oversight

Key Takeaways

• The Federal Reserve is removing “reputational risk” from its bank supervision framework, focusing instead on financial risks.

• The change is seen as a major win for the crypto industry, which has struggled with being “debanked” under vague regulatory justifications.

• Banks are still expected to comply with risk management rules, but without being penalized for subjective reputational concerns.

• Supporters praise the move for increasing transparency and fairness, while critics warn it could reduce regulatory oversight.

What Is Reputational Risk & Why It Mattered

Previously, the Federal Reserve defined reputational risk as the potential that negative publicity, true or not, could damage a financial institution’s customer base, lead to costly litigation, or hurt revenues.

The Fed Announcing The Removal Of Reputational Risk

Source: X (@federalreserve)

In practical terms, this allowed regulators to scrutinize banks’ relationships with industries seen as controversial or high-risk, including cryptocurrency, cannabis, and certain tech startups.

This concept played a central role in what the industry dubbed “Operation Chokepoint 2.0“, a supposed coordinated effort by U.S. regulators to “debank” more than 30 crypto and tech companies by pressuring banks to avoid servicing them.

What’s Changed?

In a statement released on Monday, the Federal Reserve Board said it is actively removing references to reputational risk from its supervisory documents and replacing them with “more specific discussions around financial risk.”

The agency emphasized that the new guidance is aimed at ensuring that oversight is focused strictly on measurable financial concerns, rather than subjective perceptions.

As part of the transition, the Fed will:

• Train its bank examiners to follow the new approach consistently.

• Collaborate with other federal regulatory bodies to promote a uniform application of the policy across the industry.

This change doesn’t stop banks from considering reputational risk internally, but it limits the Fed’s use of that concept in its own supervisory practices.

Crypto Industry Applauds The Decision

The crypto industry has welcomed the change as a major step forward. U.S. Senator Cynthia Lummis, a prominent supporter of Bitcoin and digital assets, chimed in.

Source: X (@SenLummis)

Rob Nichols, President and CEO of the American Bankers Association, also supported the move, stating:

“The change will make the supervisory process more transparent and consistent. 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.”

 

Risk Management Still Required

The Federal Reserve clarified that this shift does not eliminate risk management responsibilities for banks. Financial institutions must still comply with all laws and maintain strong risk protocols when dealing with high-risk industries, including cryptocurrency.

Additionally, the Fed emphasized that banks are free to continue using reputational risk as part of their internal risk assessments, even if regulators will no longer use it as a supervisory benchmark.

Regulatory Momentum Favoring Crypto

The Federal Reserve’s announcement is part of a broader trend among U.S. financial regulators loosening restrictions on crypto engagement:

• In March, the Federal Deposit Insurance Corporation (FDIC) clarified that its regulated banks no longer need pre-approval to participate in crypto-related activities.

• In May, the Office of the Comptroller of the Currency (OCC) confirmed that banks under its oversight can trade cryptocurrencies on behalf of customers and outsource certain crypto services to third-party providers.

These developments reflect growing regulatory alignment with crypto’s place in the financial system, after years of uncertainty and restriction.

FAQ

What is reputational risk?
Reputational risk refers to potential damage caused by negative public perception of a company’s business practices. For banks, it could lead to customer loss, lawsuits, or regulatory penalties.

Does this mean banks can freely work with crypto companies now?
The move makes it easier for banks to engage with crypto firms, but they must still follow all legal and financial risk guidelines.

Can banks still use reputational risk internally?
Yes. While the Fed won’t use it for supervision, banks may continue to factor reputational risk into their internal risk management strategies.