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A group of Republican senators has introduced a new bill that aims to abolish the concept of “reputational risk” in the supervision of federally-regulated financial institutions.
Led by Senator Tim Scott (R-NC), chair of the Senate Banking Committee, the bill was unveiled last week as part of the Trump administration's ongoing efforts to combat unfair debanking.
Known as the Financial Integrity and Regulation Management Act, or FIRM Act, the bill is co-sponsored by all 12 Republicans on the committee, in addition to Scott.
If adopted, the FIRM Act would eliminate all references to “reputational risk” in existing rules on the supervision of federally-regulated financial institutions.
It would also prohibit federal banking regulators from issuing new rules or guidance that use reputational risk as a component in supervisory activities.
And it would compel these agencies to report to Congress on their progress towards ending the use of the category.
“It’s clear that federal regulators have abused reputational risk by carrying out a political agenda against federally legal businesses,” said Scott.
“This legislation, which eliminates all references to reputational risk in regulatory supervision, is the first step in ending debanking once and for all.”
The term “reputational risk” is commonly used by federal banking regulators to refer to the potential that negative publicity may result in loss of confidence in a depository institution.
This could in turn lead to a decline in customers, capital or revenue, or to costly litigation in relation to the negative publicity.
The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Controller of the Currency (OCC) all use reputational risk as a component in determining the “safety and soundness” of depository institutions.
This feeds into the supervisory ratings of these institutions, which in turn can affect their ability to do business.
They may experience loss of access to capital, increased regulatory scrutiny, higher compliance costs, limits on expansion and difficulty obtaining regulatory approvals.
Scott argues that the use of reputational risk to determine supervisory ratings is not required by law and represents an “improper” use of supervisory authority.
“Federal banking agencies use reputational risk to prevent federally-regulated depository institutions from providing financial services to industries that the agencies disfavor,” he said.
Protecting digital assets firms — a key priority of the FIRM Act
As chair of the Senate Banking Committee, Scott said he is taking steps to ensure that tackling debanking is a priority issue for the new Congress.
Last month, the committee hosted a hearing on the impact of debanking, in which Nathan McCauley, co-founder and CEO of Anchorage Digital, testified as a witness.
Since 2017, according to McCauley, Anchorage Digital has offered crypto custody, trading and settlement services to institutional clients.
As the company scaled to more than 1,000 clients, including asset managers and sovereign wealth funds, it created its own bank, Anchorage Digital Bank, to aid its expansion.
In 2021, Anchorage Digital Bank was granted a federal charter by the OCC, but in 2023, an account that it had held at another institution for more than two years was abruptly shut down.
When asked why, McCauley said the institution said it was “not comfortable” with the risk posed by some of Anchorage’s crypto clients’ transactions.
“We attempted to explain that the sources of all payments from our crypto clients were fully documented as a part of our robust KYC, AML, sanctions compliance, and other internal transaction monitoring and attribution processes,” he said.
“They were uninterested. They refused to engage in further discussions, provide any additional explanation, or offer any chance to appeal the decision.”
Subsequently, and following the collapse of crypto-friendly banks Silvergate, Signature and Silicon Valley Bank (SVB) in March 2023, McCauley said that Anchorage Digital Bank was unable to open accounts at any other depository institution.
“Despite being a federally regulated bank ourselves, subject to the same liquidity, capital, and risk management expectations of other federally-chartered banks, we were debanked,” he said.
The story of Anchorage Digital has become a rallying cry for Republicans on the Senate Banking Committee, who accuse the Biden administration of conducting an Operation Chokepoint 2.0 against the digital asset sector.
Senator Cynthia Lummis (R-WY), a key ally of the sector in Congress, has said that federal banking regulators have used “politically motivated” reputational risk designations to persecute firms that deal in digital assets.
"The FIRM Act strips away their ability to play politics with our financial system and finally holds these unelected bureaucrats accountable,” she said.
“Americans deserve a transparent regulatory framework that fosters innovation in digital assets instead of smothering it with government overreach."
Banking industry reception
So far, much of the banking industry has come out in favour of the FIRM Act, seeing it not as a partisan intervention but rather as a necessary step in ensuring that the power of banking regulators aligns with their statutory authority.
Rob Nichols, president and CEO of the American Bankers Association (ABA), said the FIRM Act restores banks’ freedom to make their own decisions about who they can and cannot serve.
He described the concept of reputational risk as a “subjective concern”, and said it should not be used to pressure financial institutions into picking and choosing who to bank.
Greg Baer, president and CEO of the Bank Policy Institute (BPI), made similar comments in praise of the bill.
"BPI supports the FIRM Act as an important step toward restoring fairness and integrity in how the regulators oversee the banking industry,” he said.
“This legislation would refocus regulators on examining banks’ financial condition and legal compliance and stop them from policing day-to-day business judgments."
