OCC to Stop Inspecting Banks for Reputation Risk Targeted by GOP

A key federal regulator said its examination teams will no longer monitor national banks for any risks arising from doing business with controversial customers, echoing a call from GOP lawmakers to end “debanking” practices.

The Office of the Comptroller of the Currency will remove the term “reputation risk” from the examination manual its supervisors follow, acting agency head Rodney Hood said in a Thursday statement. The OCC regulates national banks, including the depository units of giants such as JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co.

Critics of examiners using reputation risk say it’s a broad category that allows regulators to push banks to stop serving clients seen as politically distasteful—including those in the crypto, firearms, payday lending, and oil and gas industries—even if they don’t pose an actual risk to the institution. Big banks have pushed for regulators to ease up on its use as part of the Trump administration’s deregulatory efforts.

“This marks meaningful progress in refocusing oversight on material financial risk, rather than reputational risk, operational risk, corporate governance, vendor management and other matters that do not pose a material threat to safety and soundness,” Greg Baer, the president and CEO of the Bank Policy Institute, said in a statement.

BPI includes the largest US banks among its members.

Rather than looking at reputation risk, OCC examiners will focus on whether banks have appropriate risk management tools in place to guard against threats to their safety and soundness, Hood said.

“Focusing future examination activities on more transparent risk areas improves public confidence in the OCC’s supervisory process and makes clear that the OCC has not and does not make business decisions for banks,” he said.

OCC examiners have “never used reputation risk as a catch-all justification for supervisory action,” Hood added.

Other banking regulators are eyeing similar changes to their examination policies. Federal Reserve Chair Jerome Powell pledged last month to remove language from a Fed manual telling reserve bank officials to watch for “controversial commentary or activities” by a financial institution’s leadership.

Republican lawmakers have made it a top priority to address “debanking” due to reputation risk. The Senate Banking Committee on March 13 approved legislation (S. 875) from Chairman Tim Scott (R-S.C.) aimed at preventing all banking regulators from using reputation risk in their examinations. It has the support of banking and other industry trade groups.

The US Supreme Court allowed banking and insurance regulators to use reputation risk in their examinations and enforcement actions in its ruling last May in National Rifle Association of America v. Vullo.

Regulators at the time had raised concerns that a broad ruling would have opened them up to First Amendment challenges over any use of reputation risk as part of their determinations about potentially risky bank customers.