FIRM Act Seeks to Ban 'Reputational Risk' in Bank Supervision, Aiming for Fairer Access

The Financial Integrity and Regulation Management Act, or FIRM Act, proposes a significant shift in how federal agencies oversee banks and credit unions. Its core mission, outlined in Section 4, is straightforward: require federal banking agencies to stop using 'reputational risk' as a factor when supervising these financial institutions. The bill argues this step is necessary to ensure all legal businesses and individuals have fair access to financial services, preventing what it calls potentially politically motivated decisions by regulators, referencing past issues like 'Operation Choke Point' (Section 2).

What Exactly is 'Reputational Risk' Anyway?

Before diving deeper, let's clarify terms. The bill defines 'reputational risk' as the potential hit a bank's standing could take from negative public perception of its practices, potentially leading to lost customers, lawsuits, or lower revenue (Section 3). The 'Federal banking agencies' covered include major regulators like the Federal Reserve, FDIC, OCC, the National Credit Union Administration (NCUA), and the Consumer Financial Protection Bureau (CFPB).

No More Judging Books by Their Covers? How Supervision Changes

The FIRM Act doesn't just ask agencies to ignore reputational risk; it explicitly prohibits them from regulating or examining it (Section 5). This means agencies couldn't create rules about managing reputational risk, assess how well a bank handles it, factor it into supervisory ratings, or take enforcement actions based purely on it. In practice, this could mean regulators have less leeway to question a bank's relationships with legal, but perhaps controversial, clients based on potential public backlash. The focus shifts away from public perception towards other established risk categories.

Echoes of 'Operation Choke Point': Why This Bill Exists

The bill's findings (Section 2) directly cite concerns that 'reputational risk' has been misused, pointing to the FDIC's 'Operation Choke Point' initiative as an example where regulatory pressure allegedly limited financial access for lawful businesses deemed undesirable. The FIRM Act aims to prevent similar situations by removing this specific tool from the regulators' toolkit. The intended real-world effect is that legally operating businesses, regardless of their industry, shouldn't face denial of banking services simply because association with them might attract negative attention.

Keeping Tabs: Agencies Must Report Back

To ensure compliance, the Act includes an accountability measure. Within 180 days of the bill becoming law, each federal banking agency must report back to Congress confirming they've implemented the changes and detailing any updates to their internal policies (Section 6). This serves as a check to make sure the directive to remove reputational risk considerations is actually put into practice across the regulatory landscape.