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Investing.com - The Federal Reserve announced Monday it would no longer consider "reputational risk" when examining banks, eliminating a metric that had drawn significant industry complaints.
The central bank is removing references to reputational risk from its supervisory manuals and other documents, instructing examiners to focus instead on specific financial risks. Previously, the Fed defined reputational risk as the potential for negative publicity to damage a bank’s business or result in costly litigation.
This decision aligns the Fed with other U.S. banking regulators, including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, which have also moved to drop this examination standard. Banking industry representatives had argued that policing reputational risk could lead examiners to penalize banks for activities that may be legal and financially sound.
The Fed emphasized in its statement that banks are still expected to maintain robust risk management practices despite this change. The announcement does not prevent financial institutions from considering reputational factors in their own decision-making processes.
The central bank’s move addresses longstanding concerns that the reputational risk standard could result in subjective judgments by supervisors regarding which banking activities they deemed suitable.
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