The US Federal Reserve has announced significant changes in its risk assessment approach for banks, now focusing on measurable financial criteria instead of reputational risks.
Changes in Risk Assessment
The central bank stated that it has begun reviewing references to reputational risk across its supervisory materials, replacing them with more measurable financial risk criteria. This decision implies that regulators will now concentrate more on quantifiable threats to safety and soundness rather than subjective or public perception-related risks.
Jerome Powell's Commitment
Federal Reserve Chair Jerome Powell had pledged earlier this year to revise oversight language that enabled regulators to monitor banks for 'controversial comments or activities.' This update signifies a fulfillment of that commitment, indicating a recalibration of how the Fed enforces compliance and evaluates banking practices.
Potential Benefits for Banks
The policy change could be welcomed by Republican lawmakers and crypto industry advocates. Critics have long argued that reputational risk allowed regulators to unfairly penalize banks working with politically sensitive clients or cryptocurrency firms, even when those clients posed no direct financial threat.
The elimination of the ambiguous standard of reputational risk may reduce barriers for banks serving nontraditional or controversial industries while still ensuring accountability for core financial stability.
