The Federal Reserve Board made a significant change on June 23 by removing reputational risk from its bank supervision program. This move aligns the central bank with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency, which implemented similar revisions earlier in the year. Together, these three regulators oversee all federally insured depository institutions, and the elimination of the subjective standard of reputational risk allows for a more objective assessment of financial exposures.
Previously, the concept of reputational risk could lead examiners to block banking services to cryptocurrency firms, even basic services like buying and selling Bitcoin (BTC). The new guidance from the Fed instructs examiners to focus on specific legal, liquidity, or credit channels when assessing reputational effects, emphasizing the importance of maintaining robust risk management frameworks for safety and soundness.
This shift in policy signals the Federal Reserve’s openness to regulated crypto activity. Chair Jerome Powell has advocated for a stablecoin framework and expressed support for lawful relationships between banks and crypto firms. The Senate recently passed the GENIUS Act, which aims to establish a regulatory framework for stablecoins, indicating a growing acceptance of digital assets within the financial sector.
Powell has acknowledged the need for responsible innovation in the crypto space and highlighted the presence of crypto custody services within Fed-supervised banks. The Federal Reserve is committed to preserving safety while allowing institutions to engage with digital assets in a responsible manner.
Overall, the Federal Reserve’s directive to remove reputational risk from bank supervision policy reflects a broader trend among federal regulators to focus on operational, legal, and financial criteria when assessing financial institutions. This shift paves the way for a more inclusive and innovative approach to banking services in the digital age.