The US Federal Reserve has announced a significant shift in its supervision approach, stating that it will no longer include 'reputational risk' in its oversight of banks. This change aims to alleviate the barriers faced by crypto firms that have been unjustly debanked under controversial policies like Operation Chokepoint 2.0, which affected over 30 tech and crypto companies in the US.
In a statement released on Monday, the Federal Reserve specified that references to reputational risk would be removed from its supervisory materials and replaced with focused discussions on financial risk. The board is committed to training examiners to ensure this change is implemented uniformly across institutions while collaborating with other federal regulatory bodies to uphold consistent practices.
Despite this adjustment, the Federal Reserve emphasized that banks must uphold comprehensive risk management practices within legal parameters. Notably, the board clarified that this change would not restrict banks from factoring reputational risk into their own risk management decisions.
Reputational risk is defined by the Federal Reserve as the risk of losing customers and facing litigation due to negative publicity about a bank's practices, regardless of its accuracy. Senator Cynthia Lummis praised the changes, asserting that the previous policies had severely harmed US Bitcoin and digital asset businesses. She described the recent developments as a step forward but acknowledged that more efforts are needed.
Rob Nichols, CEO of the American Bankers Association, also welcomed the decision, stating that it would enhance transparency in the supervisory process. He expressed the belief that banks should make business decisions grounded in sound risk management rather than the views of regulators.
On the flip side, some critics fear that disregarding reputational risk might veil essential non-financial issues, threaten bank stability, and lead to riskier banking practices.
This shift reflects a broader trend, as regulators across the US have been relaxing restrictions on crypto-related activities in recent months. For instance, the US Office of the Comptroller of the Currency has recently affirmed that banks are allowed to engage with cryptocurrencies on behalf of their clients, and the Federal Deposit Insurance Corporation has permitted institutions under its jurisdiction to partake in crypto activities without needing prior consent.
The easing of these restrictions signals potential growth opportunities for the crypto sector, which could lead to increased banking relationships and improved market stability in the future. Investors and crypto enthusiasts should monitor these regulatory shifts closely, as they may provide new avenues for engagement and investment in the cryptocurrency market.
In a statement released on Monday, the Federal Reserve specified that references to reputational risk would be removed from its supervisory materials and replaced with focused discussions on financial risk. The board is committed to training examiners to ensure this change is implemented uniformly across institutions while collaborating with other federal regulatory bodies to uphold consistent practices.
Despite this adjustment, the Federal Reserve emphasized that banks must uphold comprehensive risk management practices within legal parameters. Notably, the board clarified that this change would not restrict banks from factoring reputational risk into their own risk management decisions.
Reputational risk is defined by the Federal Reserve as the risk of losing customers and facing litigation due to negative publicity about a bank's practices, regardless of its accuracy. Senator Cynthia Lummis praised the changes, asserting that the previous policies had severely harmed US Bitcoin and digital asset businesses. She described the recent developments as a step forward but acknowledged that more efforts are needed.
Rob Nichols, CEO of the American Bankers Association, also welcomed the decision, stating that it would enhance transparency in the supervisory process. He expressed the belief that banks should make business decisions grounded in sound risk management rather than the views of regulators.
On the flip side, some critics fear that disregarding reputational risk might veil essential non-financial issues, threaten bank stability, and lead to riskier banking practices.
This shift reflects a broader trend, as regulators across the US have been relaxing restrictions on crypto-related activities in recent months. For instance, the US Office of the Comptroller of the Currency has recently affirmed that banks are allowed to engage with cryptocurrencies on behalf of their clients, and the Federal Deposit Insurance Corporation has permitted institutions under its jurisdiction to partake in crypto activities without needing prior consent.
The easing of these restrictions signals potential growth opportunities for the crypto sector, which could lead to increased banking relationships and improved market stability in the future. Investors and crypto enthusiasts should monitor these regulatory shifts closely, as they may provide new avenues for engagement and investment in the cryptocurrency market.
