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Goodbye, Reputation Risk
Regulators are striking references to reputation risk from their examination handbooks.
Travis Hill, acting chairman of the Federal Deposit Insurance Corp., this week wrote in a letter obtained by Bank Director that the agency is “actively working” to remove reputational risk from the supervisory process, saying it adds “no value” in examining safety and soundness. Last week, Acting Comptroller of the Currency Rodney Hood similarly announced that the OCC would no longer examine for reputation risk.
Banking regulation first mentioned reputation risk in the mid-1990s, when it was seen as a risk to earnings and capital due to potential litigation or lost business, according to the paper “Regulating Bank Reputation Risk” by Julie Hill, now dean of the University of Wyoming College of Law. From there, she wrote, “reputation risk worked its way into nearly every aspect of banking regulatory guidance.” The Federal Reserve’s bank examination manual referenced reputation 184 times, according to the 2019 paper. The FDIC and OCC acknowledged it 51 and 58 times, respectively.
“The way reputation risk was defined in the guidance, in the examination procedures, and the way it was carried out, was far more subjective than the objective, financial-based metrics that we're used to for examinations,” says Max Bonici, a partner at Davis Wright Tremaine. Reputation risk was also subject to the political whims of Washington. During the Biden administration, he says, this had a chilling effect on crypto companies’ access to the banking system. On Friday, the FDIC provided new guidance allowing institutions to "engage in permissible crypto-related activities without receiving prior FDIC approval."
Reputation risk also tends to be a secondary effect of poor performance or illegal activity. Sure, Silicon Valley Bank failed after a deposit run, but its customers — largely companies with high levels of uninsured deposits — were highly concentrated in the innovation ecosystem. That was measurable.
Notably, the Department of Justice fined Wells Fargo & Co. $3 billion related to its 2016 account opening scandal, resulting in additional regulatory scrutiny and significant harm to its reputation. But the incident didn’t diminish the bank’s sizable footprint.
“While a bank’s reputation is critically important, most activities that could threaten a bank’s reputation do so through traditional risk channels,” wrote Hill in his letter. And despite any action — or inaction — from supervisors, banks shouldn’t lose sight of those risks.
• Emily McCormick, vice president of editorial & research for Bank Director
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