Banks no longer police “reputation risks”

Pete Schroder

WASHINGTON (Reuters) – The Federal Reserve announced Monday that it would direct its supervisors to no longer consider “reputation risks” when investigating banks, and would scrap the indicators that were the focus of industry complaints.

In a statement, the Fed said it had removed references to that risk in the supervisory manual and other documents, and directed examiners to focus on specific financial risks. The Fed defined reputation risk as the possibility of negative publicity that could hurt the bank’s business or lead to costly litigation.

The Fed will join other US bank regulators (the Secretary of Currency and the office of the Federal Deposit Insurance Corporation) and move to remove its examination criteria. The bank complained that police at such risk could lead to the examiner portraying the bank on matters that may be legal and not financially risky, leading to subjective judgments by supervisors where banking activities are appropriate.

In a statement, the Fed said it still hopes the banks have robust risk management. The announcement also said it would not prevent banks from considering reputational risks themselves when making decisions.

(Reporting by Pete Schroeder, Editing by Chris Reese and Leslie Adler)