Federal Reserve Drops Reputational Risk from Bank Supervision Framework

Key Takeaways

• Reputational Risk Dropped: The Federal Reserve will no longer include reputational risk as a component in its bank examination programs.
• Focus on Financial Risk: References to reputational risk will be replaced with more specific language centered on financial risk in supervisory materials.
• Internal Use Still Permitted: Banks may still assess and manage reputational risk within their own internal frameworks; the change only affects Fed supervision.
• No Relaxation of Risk Standards: The Fed reaffirmed that banks must continue to maintain strong risk management practices to ensure safety, soundness, and compliance.
• Push for Consistency: The Fed plans to coordinate with other regulators and train examiners to ensure uniform implementation of the new approach.

Deep Dive

In a notable shift to its supervisory approach, the Federal Reserve Board announced Monday that reputational risk will no longer be a formal component of its examination programs for banks. The move marks a departure from long-standing practices in regulatory supervision and signals a recalibration of how the Fed evaluates risk within financial institutions.

The central bank has begun reviewing and removing references to reputational risk across its supervisory materials, including examination manuals. Where appropriate, those references will be replaced with more precise language focused on financial risks. The Board also confirmed it will train examiners to ensure the change is applied consistently across the institutions it oversees.

The decision is not expected to diminish the Fed’s overall supervisory expectations. The Board emphasized that it still requires banks to maintain robust risk management frameworks that support both safety and soundness and compliance with applicable laws and regulations.

Importantly, the change applies specifically to the Fed’s own supervisory procedures and does not prohibit banks from continuing to consider reputational risk in their internal governance and risk management programs. The Board also noted that it will coordinate with other federal bank regulatory agencies to encourage consistent examination practices across the regulatory landscape.

The Fed's announcement reflects a broader trend of regulators seeking to streamline and clarify supervisory expectations, particularly in distinguishing between quantifiable financial risks and broader, often more subjective concerns like reputation. While reputational risk has traditionally been viewed as a key pillar of effective risk management, its exclusion from formal Fed examinations may invite scrutiny from stakeholders concerned with governance, ESG, and public trust issues.

The policy update comes at a time when financial institutions are under growing pressure from a wide range of stakeholders, including investors, customers, and regulators, to manage non-financial risks such as climate exposure, social impact, and ethical conduct. How the Fed's decision interacts with these trends remains to be seen.

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