The Federal Reserve of the United States has announced the removal of reputational risk criteria from bank examinations, altering its approach towards financial institutions.
Scrapping Reputational Risk
The Federal Reserve has discontinued the use of the term 'reputational risk' in evaluating banking institutions. This measure, announced on Monday in Washington, aims to protect financial institutions from restrictions imposed by vague criteria. Banks had previously criticized this practice as a way for regulators to overstep their bounds by blocking legal but controversial services, particularly in relation to cryptocurrency.
Political Pressure on the Fed
The Fed's decision comes amid increasing political pressure from President Donald Trump, who has openly criticized Chair Jerome Powell. Trump has demanded aggressive cuts to interest rates, citing the need to reduce the cost of funding government debt. This has created a conflict between strong political pressure and expectations regarding economic stability in the country.
Future of Jerome Powell
Jerome Powell's term is set to expire in less than a year, and there are concerns that Trump may attempt to replace him. Although the Supreme Court recently denied a request for the ability to fire federal commissioners, there is speculation that Trump may announce his successor to undermine Powell's influence. Such a strategy could have both advantages and risks, as choosing a contrasting figure could complicate future actions of the Fed.
Thus, the change in the Federal Reserve's approach to reputational risks could significantly affect financial institutions, providing them with greater freedom in choosing business models and directions, especially in the cryptocurrency sector. However, political pressure and potential leadership changes remain on the agenda.
