The U.S. Federal Reserve is taking a significant step towards codifying a rule that removes “reputation risk” from banking supervision, a move that has been praised by industry leaders and politicians alike. The proposal, which is now open for public comment, aims to prevent financial institutions from cutting off services to lawful businesses based on political or social pressures.
“We have heard troubling cases of debanking, where supervisors use concerns about reputation risk to pressure financial institutions to debank customers because of their political views, religious beliefs, or involvement in disfavored but lawful businesses,” said Michelle Bowman, vice chair for supervision at the Fed. “Discrimination by financial institutions on these bases is unlawful and does not have a role in the Federal Reserve’s supervisory framework,” she added.
Background on the Proposal
The Fed first began making changes in June of last year, directing its supervisors to stop pressuring banks to close client accounts over reputation risk. This means that banks can only make decisions about clients based on financial risk management, not on the potential for reputational damage. The latest move seeks to turn this guidance into a formal rule, solidifying the Fed’s stance on the issue.
Industry Reactions
Cynthia Lummis, a prominent advocate for crypto and blockchain technology, praised the Fed’s move on social media. “Glad to see this important step to permanently remove ‘reputation risk’ from Fed policy and put Operation Chokepoint 2.0 to rest so America can become the digital asset capital of the world,” she wrote.
Alex Thorn, head of firmwide research at Galaxy Digital, also commended the proposal, noting that it continues the rollback of what many in the crypto industry refer to as “Operation Chokepoint 2.0.” This term describes a perceived coordinated effort by the U.S. government and banking sector to cut off crypto firms from traditional banking services.
The Broader Context
The current administration has been actively pushing to end debanking practices in the U.S. In August, former President Donald Trump explored a draft order to direct bank regulators to investigate debanking claims from crypto firms and conservatives. The order also sought to scrap policies that led banks to cut ties with such clients due to reputational risk.
Trump himself is currently embroiled in a $5 billion legal battle with JPMorgan over the closure of his accounts, alleging that the bank acted unlawfully for political reasons in 2021. JPMorgan has argued that the case has no merit, but a former executive recently acknowledged in court that the bank closed Trump’s account following the January 6 Capitol Hill riots.
Looking Ahead
The Fed’s proposal is a crucial step towards ensuring that financial institutions operate without undue influence from political or social pressures. By focusing on financial risk management, the Fed aims to create a more equitable and transparent banking environment. However, the proposal will need to withstand public scrutiny and potential challenges from various stakeholders.
As the crypto and digital asset industries continue to grow, the removal of reputation risk from banking supervision could be a significant catalyst for further innovation and adoption. The next 60 days will be crucial as the Fed gathers feedback and fine-tunes the rule to ensure it meets the needs of all parties involved.
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