The FED recently announced a significant shift in its approach to bank inspections by removing the reputational risk criterion from evaluations.
Changes in the FED's Audit Approach
The Federal Reserve System has stated that it will no longer consider the "reputational risk" criterion during bank inspections. References to reputational risk in audit materials will be reviewed and replaced with more concrete financial risk assessments.
Reactions to Reputational Risk from Authorities
This move may be welcomed by some industry representatives and Republican politicians who have long opposed the practice. They argue that the reputational risk criterion was overly broad and unfair, leading regulators to crack down on banks working with politically sensitive clients or cryptocurrency companies.
Expectations on Risk Management in Banks
FED Chairman Jerome Powell promised in February to remove language allowing regulators to monitor banks for "controversial comments or activities." The FED emphasized that this change does not diminish their expectation for banks to maintain strong risk management practices to ensure their safety and soundness.
Thus, the FED is reassessing its monitoring approaches, shifting focus towards clearer financial risks, while maintaining high expectations for risk management.
