The Federal Reserve Board has announced that it will eliminate reputational risk as a component of examination programs in its supervision of banks.

The Fed joins the OCC in eliminating reputational risk as a part of their examinations.

The Fed stated it has commenced the process of reviewing and eliminating references to reputational risk from its supervisory materials, including examination manuals. The Board added that it “will train examiners to help ensure this change is implemented consistently across Board-supervised banks and will work with the other federal bank regulatory agencies to promote consistent practices, as necessary.”

The Fed added, “This change does not alter the Board’s expectation that banks maintain strong risk management to ensure safety and soundness and compliance with law and regulation nor is it intended to impact whether and how Board-supervised banks use the concept of reputational risk in their own risk management practices.”

The Fed said that where appropriate, it will replace references to reputational risk in its materials with more specific discussions of financial risk.

Reputational risk received attention during the Obama Administration’s Operation Choke Point, as banking regulators examined banks serving payday lenders, gun dealers, and other companies. However, more recently, there have been concerns expressed that reputational risk was considered by banking regulators evaluating institutions involved with crypto or digital assets.

In April, the OCC announced it was removing reputational risk from its handbooks and guidance.  The FDIC has stated that  it is moving to do the same. Acting FDIC Chairman Travis Hill said the agency has done an extensive review of regulations, guidance and other policies that address reputational risk. He said at the time he expected the FDIC to issue a rule “in the near future.”

Senate Banking, Housing and Urban Affairs Chairman Sen. Tim Scott, R-S.C. applauded the Fed’s decision.

“We appreciate that the Federal Reserve announced on June 23^rd that reputational risk will no longer be a component of examination programs in its supervision of banks,” Scott wrote, in a letter to Fed Chairman Jerome Powell. “Removing reputational risk from bank supervision is a necessary first step in ending politicization at the Federal Reserve. But the agency needs to ensure that examiners implement this change so that politics is truly rooted out of bank supervision.”

American Bankers Association President and CEO Rob Nichols also endorsed the Fed’s plan.

“We have long believed banks should be able to make business decisions based on prudent risk management and the free market, not the individual perspectives of regulators, Nichols said. “This change will make the supervisory process more transparent and consistent while enabling banks to better meet the needs of their customers, clients and communities.”

However, Elyse Schupak, policy advocate with Public Citizen, derided the Fed’s decision to end the use of reputational risk.

“This move is driven by politics, not the concerns of consumers or the public interest,” Schupak said, adding, “It seeks to entrench certain companies and industries, such as fossil fuels and cryptocurrency, even if doing so creates undue financial, reputational, or legal risks for banks. A bank’s reputation is consequential to its financial performance and stability, as banks themselves and policymakers from both parties have acknowledged. There is no reason beyond politics to remove this critical component of bank supervision.”