Reputational risk will exist whether or not regulators look for it

Why should I care about a bad reputation anyway?
A handful of very important bank regulators this week scrubbed the words "reputational risk" from their official documents, and probably their websites, and maybe their hearts, our Maria Volkova reported yesterday. The Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. all collectively did this, arguing that reputational risk can be misconstrued and used by supervisors to pressure banks to drop certain customers.

Whether this effort will achieve its intended purpose is an open question. It seems, to me at least, that the zeal to scrub "reputational risk" as a criteria for bank supervisors stems broadly from the backlash in this administration from the purported debanking of some clients. The idea is that if regulators can't look at reputation it can't lean on banks to use reputation, either. 

I don't wonder if this policy will achieve its stated goals, because I don't think there is a broad problem in the industry of banks discriminating on the basis of politics, or religion, or race, or some other superficial criteria. It is simply not realistic today. Not that there has never been, but that there isn't now. I think, therefore, this is a misguided effort that will have little of its intended effect. I do wonder, though, if it will have unintended effects.

"Eliminating reputational risk as a formal concept doesn't create clarity," Brett Erickson of Obsidian Risk Advisors wrote on these pages last summer. "It creates a blind spot." He argued that reputational risks usually show up as the kinds of red flags that later become crises, such as the Wells Fargo fake-accounts scandal. Reputation is a tool that anybody involved in managing money – whether it be a bank or a regulator overseeing a bank – should use. What these agencies are doing is, Erickson said, "a strategic error."

Still waiting on bitcoin
You may not know this about me but I spent a lot of time covering bitcoin and cryptocurrencies for The Wall Street Journal. I started doing it in 2013 and kept doing it through 2022. I co-authored two books, appeared in two documentaries, and wrote I don't know how many articles. I tell you this not to impress you, it's not particularly impressive anyway, but just to let you know where I'm coming from. 

When I started getting interested in bitcoin, there was a real feeling that it was something that could change the world. This was still fairly soon after the financial crisis and people were still bitter about the crisis and the fallout. I was one of them. And then here's this thing that is being sold as an alternative kind of money. And you know what? It was really intoxicating. Even for me, who was viewing this all only as a story. I never bought bitcoin or any other crypto. It was always just a story. But it was a fascinating story. Then, over the years, the story changed. A few people here and there really did try to make bitcoin money. But people weren't using bitcoin as a new form of money. They were using it as a new form of gambling. They were using it as a new form of money laundering. Bitcoin largely became a story about the price of bitcoin, and little else.

Apart from Jack Dorsey, it feels like most people have given up on the idea of bitcoin being used as a new form of money. I'd written recently about bitcoin's inability to improve on the trust model built over centuries by banks and governments. It was echoed in a BankThink essay by Jacob O. William last month, where he said crypto's failures are a failure of architecture. And the main point was echoed by the president of the Minneapolis Fed, Neel Kashkari, in a speech he delivered this week, as our Kyle Campbell reported. Kashkari said he was skeptical about both the usefulness of stablecoins and the willingness of foreign governments to allow the proliferation of dollar-pegged digital assets in their economies. "I will confess, 17 years of watching bitcoin leaves me pretty skeptical," he said.

I know how he feels.