BPI Comments on Federal Reserve’s Proposal on Prohibition of Reputation Risk

Ladies and Gentlemen:

The Bank Policy Institute^[1] supports the proposal by the Board of Governors of the Federal Reserve System to codify the removal of reputation risk from its supervisory programs.^[2] The proposal would prohibit the Board from encouraging or compelling Board-supervised banking organizations to deny or condition the provision of banking or other financial products or services to an individual or business based on their constitutionally protected political or religious beliefs, associations, speech, or conduct, or based on involvement by the individual or business in politically disfavored but lawful business activities perceived to present reputation risk.^[3]

As BPI noted in its comment letter in response to the FDIC and OCC's proposal on the Prohibition on Use of Reputation Risk by Regulators, removal of reputation risk from the risks that the regulators evaluate is a necessary and common-sense change.^[4] BPI shares the view that regulators should not encourage or compel banking organizations to deny or condition the provision of banking or other financial products or services on the basis of constitutionally protected political or religious beliefs.^[5]

Management and directors at Board-supervised banking organizations routinely exercise independent business judgment, including defining, measuring, and monitoring risks relevant to their organization's reputation. As the proposal highlights, reputation risk came into "prevalence as a supervisory concept in the 1990s" and that "the concept generally was not used in the Board's supervisory programs before that time."^[6] Since that time, reputation risk became prevalent in examiner handbooks and guidance, guidelines, and regulations.^[7] It was not until this year that the Board began removing references to reputation risk from its supervisory programs and materials.

BPI has previously expressed concerns about the incorporation of reputation risk into the supervisory framework and how examiners have used it to pressure financial institutions to refrain from engaging in certain bank activities. In effect, the supervisory focus on reputation risk has shifted the role of examination from evaluating the financial condition of the firm and protecting depositors to opining on an institution's ordinary course strategic and operational decisions. Using reputation risk as the basis for supervisory criticism increases subjectivity in banking supervision and interferes with a firm's ability to exercise its own business judgment. Further, eliminating reputation risk aligns with the Board's stated policy that "examiners and other supervisory staff should prioritize their attention on a firm's material financial risks."^[8]

BPI has also expressed concern about customer account closures caused by overreaching anti-money laundering and reputation risk regimes. Although much of the bank examination process occurs in secret, there have been several reported instances suggesting how bank regulators can use the vague concept of reputation risk to pressure regulated entities to end their relationships with disfavored businesses.^[9]

As the preamble notes, the proposal reflects the Board's "experience that reputation risk can be difficult to quantify and communicate, making it challenging for firms to remedy identified concerns."^[10] BPI agrees that use of reputation risk as the basis for supervisory criticism increases subjectivity in banking supervision, making it a difficult area to regulate in a consistent way to add meaningful value to the regulatory system. The Board has, and will continue to have, broad powers over traditional risk channels, which makes citations to reputation risk unnecessary.

For these reasons, we support the Board finalizing the proposal without delay.

We appreciate the Board's effort to codify the removal of reputation risk from its supervisory programs. We further appreciate the Board's acknowledgement that the decision to provide financial products and services rests with the banking organization providing such product or service, not with examiners. We encourage the Board to adopt the proposal without delay. If you have any questions, please contact Jeffrey Luther ([email protected]).

Respectfully submitted,

/s/

Jeffrey Luther
Vice President
Assistant General Counsel
Bank Policy Institute

[1] The Bank Policy Institute is a nonpartisan public policy, research, and advocacy group that represents universal banks, regional banks, and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.

[2] Prohibition on the Use of Reputation Risk or Other Supervisory Tools To Encourage or Compel Banking Organizations To Engage in Politicized or Unlawful Discrimination, 91 Fed. Reg. 9499 (Feb. 26, 2026) (hereinafter "NPR").

[3] Id. at 9504.

[4] BPI, Comment Letter on Proposed Rule on Prohibition on Use of Reputation Risk by Regulators (Dec. 29, 2025), https://www.regulations.gov/comment/OCC-2025-0142-0029.

[5] BPI has previously endorsed removal of reputation risk from examination handbooks. See, e.g., BPI, BPI Response to OCC's Decision to Cease Examinations for Reputation Risk (Mar. 20, 2025), https://bpi.com/bpi-response-to-occs-decision-to-cease-examinations-for-reputation-risk; BPI, How and Why Are Regulators Protecting the Reputations of Banks? (Jan. 10, 2020), https://bpi.com/how-and-why-are-regulators-protecting-the-reputations-of-banks.

[6] NPR at 9499-500.

[7] See NPR at 9500 ("In subsequent years, reputation risk was included in other supervisory materials. For example, in the case of the Board, this included guidance related to risk-focused safety and soundness examinations and inspections and consumer compliance risk in bank holding companies.").

[8] Mary Aiken & Julie Williams, Statement of Supervisory Operating Principles, Board of Governors of the Federal Reserve System Division of Supervision and Regulation (Oct. 29, 2025).

[9] See, e.g., NRA v. Vullo, 602 U.S. 175 (2024) ("As superintendent of the New York Department of Financial Services, Vullo allegedly pressured regulated entities to help her stifle the NRA's pro-gun advocacy by threatening enforcement actions against those entities that refused to disassociate from the NRA and other gun-promotion advocacy groups."); U.S. House Committee on Financial Services Final Staff Report, Operation Choke Point 2.0: Biden's Debanking of Digital Assets (Dec. 2025) (discussing how federal regulators "pressured banks to close accounts of businesses solely because they were ideologically opposed to their existence").

[10] NPR at 9500.