The Federal Reserve (Fed) of the United States has officially eliminated the use of the term 'reputational risk' in its supervisory framework for banks. This move may ease pressure on banks to steer clear of servicing clients in the cryptocurrency industry and other controversial sectors.
What Has Changed in Fed Regulation
In a letter released on Monday, the Fed announced the replacement of the vague label 'reputational risk' with more specific financial risk categories. This step mirrors recent actions taken by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). 'The formal rating is intended to highlight and incorporate both the quantitative and qualitative aspects of an examiner’s review,' the Fed’s Board of Governors stated in the letter. This change does not alter expectations around risk management or compliance with existing law.
Crypto Industry Reaction to the Changes
Crypto advocates welcomed the move. Wyoming Senator Cynthia Lummis, one of the industry's most vocal supporters in Congress, called the Fed's decision 'a win' but added that 'there is still more work to be done.' Back in March, Senate Banking Committee Chair Tim Scott introduced legislation to ban the use of reputational risk in supervisory ratings altogether. That bill is still pending.
Future of Banking and Crypto Interaction
The Fed's update may offer banks more room to engage with digital asset companies after years of caution, particularly following high-profile regulatory crackdowns and bank failures tied to the crypto sector in 2023. However, as Lummis noted, the broader battle over fair access to banking services for the crypto industry is far from over. The Fed also withdrew its 2022 supervisory letter requiring banks to notify regulators about crypto-related activities, simplifying the monitoring of crypto activities.
The Federal Reserve's decision to eliminate consideration of reputational risk in its regulation opens new opportunities for banks to work with the cryptocurrency industry, but experts warn that further efforts are needed to ensure fair access to banking services.
