On February 23, the Fed announced that it has issued an NPRM and requested public comment on a proposal to codify the removal of “reputation risk” from its supervisory programs. The proposed rule would also expressly prohibit examiners from encouraging or compelling Fed‑supervised banking organizations to deny or condition financial products or services based on constitutionally protected beliefs or conduct or lawful — but politically disfavored — business activities perceived to present reputation risk. The proposal followed the Fed’s June 2025 policy change eliminating reputation risk as a component of bank examinations and revising supervisory materials accordingly (covered by InfoBytes here). The Fed’s announcement explained that the proposal seeks to address concerns the Fed has received of examiners using reputation risk to “pressure” institutions to “debank” customers for purportedly disfavored, but lawful, practices, beliefs, or business involvement.

The Fed stated that this proposal aligns with its experience that reputation risk, defined by the proposed rule as “the potential that negative publicity regarding an institution’s business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions,” is difficult to quantify and communicate. The Fed’s notice explained that lending, account access, and other service decisions rest with the banking organization, acting in accordance with applicable law, but reiterated that the proposal would not alter the expectation that banks maintain strong risk management in compliance with applicable laws. Comments on the proposed rule are due by April 27.