- Key insight: A recently finalized rule by the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency would limit bank examiners' ability to flag reputational risks – except if they are related to financial or operational risks at the bank, a concession that experts say could merely trade one subjective risk category for another.
- Expert quote: "Any type of scandal is dangerous to a bank, especially if it signals either financial problems or a level of management incompetence that erodes trust." — Todd Baker, senior fellow, Richman Center for Business, Law & Public Policy, Columbia University.
- Forward look: The reputational-risk rule, while directed at bank examiners, is part of a broader effort to root out debanking, an area that could see more enforcement coming, Comptroller of the Currency Jonathan Gould has suggested.
A recently finalized rule barring bank examiners from using reputational risk as the basis for a complaint to bank management includes exceptions that experts say show how difficult it is to distinguish cleanly between material and trivial risks — and how messy it can be to try to sort one from the other.
The rule,
But the final rule included an exception for those concerns if the activity in question directly affects the bank's financial or operational condition, providing examiners with a more expansive remit than what was considered in the
"Banks are essentially a 'confidence game,' insofar as the willingness of people and institutions to place uninsured deposits into a bank is entirely based on public perception of safety and soundness," Baker said. "Any type of scandal is dangerous to a bank, especially if it signals either financial problems or a level of management incompetence that erodes trust.
"Creating the type of hard line distinction between the two — as this rule seeks to do — is a fool's errand," Baker added.
The FDIC and OCC final rule implements President Donald Trump's "Guaranteeing Fair Banking For All Americans"
"By focusing on reputation risk, supervisors attempt to understand and anticipate public opinion … and then to attempt to directly connect this public opinion regarding issues and events to an institution's condition in ways that have proven nearly impossible to assess or quantify with accuracy," the
Caroline Swett, a partner at Debevoise and Plimpton, says the final rule acknowledges that public perception has a role to play in bank examination — a fact best illustrated by bank runs, where customers all attempt to withdraw their deposits at the same time out of fear that the institution is insolvent, a notoriously self-fulfilling prophecy.
"I think what the agencies are trying to address is to remove from the ambit of supervision issues that are not as obviously linked to changes in the financial condition," Swett continued. "For example, concerns that the public might not like the fact that an institution banks certain sectors."
Brian Knight, Senior Counsel for the
"This is a significant change compared to the world before the rule," Knight said. "Of course, this doesn't automatically stop regulators from stretching their power, but it at least provides courts with an enforceable regulation to use as a guidepost."
Nicholas Anthony, policy analyst in the Cato Institute's Center for Monetary and Financial Alternatives, argues that while "public perception is a real factor to consider for every business," he would have liked to have seen the rule go further, given that the exceptions preserve subjectivity in an area that is difficult to quantify. He argues managing public perception should be left entirely to individual institutions rather than the bank examiners.
"The key problem is that public perception is too subjective for a one-size-fits-all approach from regulators," Anthony said. "What may be good press for a fintech serving cannabis businesses could be bad press for a community bank serving Christian organizations. Yet, both institutions can thrive in their own niche. That's why reputational risk regulation should be taken off the table, not kept with roundabout carveouts."
But in widening examiner discretion in the final rule, regulators acknowledge that the realm of reputational risk is not entirely made up of frivolous concerns, but includes issues — like public confidence — that could materially harm a bank. Questions about a bank management's competence, for example, may inherently include subjective metrics based on an examiner's discretion, but that doesn't mean the risk is immaterial.
"Unlike public concerns about an institution doing business with politically controversial people or entities, concerns about an institution's financial [or operational] condition have been shown repeatedly to lead to a direct negative impact on the institution that can cause failure," the agencies wrote in the final rule. "Perception that an institution could be susceptible to a breakdown in the provision of services due to operational issues such as a cyberattack or a natural disaster could have a direct impact on customer's willingness to do business with an institution and thus on the institution's financial solvency."
Aaron Klein, a fellow at the Brookings Institution and policy director at the Center on Regulation and Markets, said that the final rule was softened as an improvement, but he says a banks' character is an integral part of material risk to a bank. Limiting the examiner's ability to even raise those concerns to management is unlikely to make the bank safer, he argued.
"Banking is a reputation-based business, so the attacks on reputational risk as a regulatory tool driving 'debanking' are misguided," Klein said. "The most successful banks are the ones that have a relationship with their customers and to whom their customers trust."
Anthony said there's an important overlap between public confidence in the operational soundness of an institution and its reputation, noting that "with each hit to an institution's reputation, confidence will wane."
But he argues that the subjective nature of trying to quantify this risk means that regulators should be wary of trying to turn markers of perception into enforceable supervisory actions.
"Leaving operational risks on the table will allow governmental debanking to continue to occur,' Anthony said. "An examiner concerned about a bank's relationship with a cryptocurrency exchange, a firearms manufacturer, or a cannabis company can frame that concern as: customer concentration creates operational risk; the industry's regulatory uncertainty creates third-party compliance exposure; the customer's own operational volatility creates funding volatility for the bank."
Klein said he is sympathetic to concerns about subjectivity in bank supervision, but said a better way to get at that problem would be to institute for more transparency around regulators' internal grading system — which grades capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk, known as the CAMELS rating — rather than eliminating reputational risk.
"My answer is, let's grade the regulators, let's publish everybody's CAMELS scores," Klein said. "I have a lot of sympathy to this argument that regulators are overly empowered to give people ordinal grades with no check … it's like if a professor just assigned letter grades but didn't have to share with the students what their percentages were."
At Tuesday's FDIC board meeting, Comptroller of the Currency Jonathan Gould called the rule a step in the right direction in ensuring supervisory action is more focused on objective measures of safety and soundness. He also said that the OCC will be "bringing accountability" to "agencies and certain banks" if complaints about unlawful debanking prove to be well-founded.
"We continue to delve into the details of specific complaints [which] should shine a spotlight on the actions of agencies and certain banks, bringing accountability and ensuring that neither we nor banks restrict access to financial services on the basis of political or religious beliefs or lawful business activities," Gould said.
While the administration has been focused on reigning in examiner discretion, Gould has led the charge in rooting out instances of unlawful debanking by the banks themselves. In preliminary findings from a probe into debanking launched earlier in 2025, the OCC
Swett said the push to scrutinize banks' own business decisions sits uneasily with the broader policy rationale.
"The whole policy behind it, or statements around [the debanking initiative] has been, 'This isn't intended to impact decisionmaking by banks' … own businesses and strategy and so forth," Swett said. "I think there is a tension."
Klein said the administration's fixation on debanking as a means of highlighting the alleged excesses of the Biden administration's regulatory approach misses the real harms that individuals and businesses experience from losing or not being able to obtain banking services and products.
"When you say debanking, I hear people who can't get bank accounts, and that list of people is generally defined by a group of people who work in the cannabis industry, recent immigrants without credit scores — like this
