Federal banking regulators recently announced that they will no longer examine banks for reputation risk. But they also went a step further by removing any references in examiner guidance to reputation risk or even the word “reputation.” These efforts come across as ham-handed, Orwellian, and more than a little silly.
What is Reputation Risk?
Reputation risk arises when negative public opinion adversely affects a business’s financial condition. This risk can expose the institution to litigation, financial loss, or damage to its reputation. While these risks can be hard to quantify, they are real. Just ask Tesla shareholders.
Those who oppose supervision of reputation risk often frame it in terms of penalizing “politically disfavored” activities. That makes it look as though opponents of reputational risk exams are taking the side of the underdog. But look at those activities that have received the most attention. Oil and gas industries, the NRA, predatory lenders, crypto. These are controversial but politically powerful groups and examiners are now being asked to ignore some obvious red flags.
The Great Erasure
In March 2025, the OCC announced that it will no longer examine banks for reputation risk and that it is removing references to reputation risk in its handbooks and guidance. The FDIC and Federal Reserve soon followed suit. Acting Comptroller Rodney Hood argued that “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.” We shall see.
Frequent updating of examiner handbooks has never been OCC’s forte. Some sections have gone for decades without revision, despite changes to both regulations and to the economic environment. The crusade against reputation risk is different. Apparently believing ignorance is strength, the OCC enlisted an army of Winston Smiths to excise not only references to reputation risk but even the word “reputation.”
The Asset Securitization section of the Comptroller’s Handbook provides a good case in point. The last substantive update to this section occurred in 1997. While imprudent and even abusive securitization activity played a major role in the global financial crisis (GFC), the OCC never saw fit to revise this section of the handbook to incorporate lessons learned. Nor does it incorporate important regulatory changes, such as risk retention requirements.
While OCC may have been too darn busy to update the Securitization section over the past quarter century, the agency apparently had time to remove that section’s 21 references to reputation risk. Was this section loaded with woke agitprop far beyond the agency’s remit? Hardly. For example, one excised section notes, “Poorly performing assets or servicing errors on existing transactions can increase the costs and decrease the profitability of future deals. Reputation as an underwriter or servicer is particularly important to issuers that intend to securitize regularly.” In fact, such deteriorating performance effectively shut down much of the mortgage securitization market by early 2008.
In another example, a revised sentence reads as follows: “Although the bank may have sold the ownership rights and control of the assets, the bank’s reputation as an underwriter or servicer remains exposed.” Does this sentence even make any sense without the struck through word?
The Handbook section on Liquidity provides another example. One excised section notes the following: “Reputation issues, whether real or perceived, (e.g., negative information shared on social media, fraud, money laundering, consumer harm) could cause or accelerate a run on deposits or cause funds providers to call borrowings before anticipated, consequently causing liquidity stress.” This section alludes to an SVB-style run, where social media amplified the bank’s weaknesses and led to record deposit outflows. The Liquidity section mentions social media two other times, but only in the Exam Procedures. Examiner handbooks usually lead off with an introduction, discussion of fundamentals, and risk management principles to provide context for specific exam procedures. It might help less seasoned examiners understand how adverse social media can adversely affect liquidity before jumping into the procedures.
The Reputation Risk Bogeyman
Attempts to banish reputation risk from the regulators’ lexicon imagine a bogeyman of out-of-control examiners obsessed with reputation risk. This is a dubious assumption. Regulators rarely took formal enforcement action solely due to reputation risk. OCC, for example, never had a bulletin or Handbook section devoted specifically to reputation risk. Rather, it was treated as an element of other risks (e.g., liquidity) or among litany of risks associated with a particular activity. Even in those supposedly bad old days, examiners were loath to take a hard look at a bank’s reputation risk.
The sales practices scandal at Wells Fargo provides a case in point. Internal reviews by the Treasury Inspector General and OCC’s Enterprise Governance group found that OCC examiners missed opportunities to follow up on red flags. They failed to prioritize the reputation risk associated with the activity and focused more on reputation risk management processes rather than on reputation risk itself.
More thoughtful critiques of examining reputation risk note that serious concerns around reputation risk often fall under other risk stripes as well. For example, there can be considerable overlap between reputation risk, strategic risk, and compliance risk. But not always. As a now deleted passage of the Insider Activities section of the Handbook notes, “While most risks can be measured and quantified, insider abuse can damage a bank’s reputation beyond the dollar amount of any credit loss. Improper insider activities can undermine public confidence in a bank. Market perception of the integrity of a bank’s insiders is fundamental to the bank’s financial health and ongoing viability.”
A More Thoughtful Approach
If incoming regulators believe that examiners place too much emphasis on reputation risk, there is a more systematic and intelligent way of approaching the issue. First, try to determine whether there really is a problem. Look at prior exams and other supervisory activities to see whether the agency took unwarranted actions on the basis of reputation risk. What Marc Andreessen says on a podcast doesn’t count. If they then believe it is an issue or at least that resources could be better used elsewhere, they should then look at existing guidance. Do a gap analysis. Are potential concerns currently covered under reputation risk adequately covered under other risk stripes? The mere mention of reputation risk does not obligate supervisors to examine and take supervisory action based on this risk.
Concluding Thoughts
Mr. Hood suggests removing reputation risk from examiner guidance “improves public confidence in the OCC’s supervisory process.” The agency’s approach may be consistent with the current ethos of moving fast and breaking things. But does trying to turn examiners into Sergeant Schultz when it comes to reputation risk promotes public confidence? Requiring regulators to pretend that they see, hear, and know NOTHING about reputation risk doesn’t make the risk go away.