Federal Reserve Moves to Permanently Ban “Reputation Risk” in Bank Supervision
The U.S. Federal Reserve has taken a significant step to formally eliminate “reputation risk” as a factor in bank supervision, a shift aimed at curbing the controversial practice of financial institutions closing client accounts based on perceived public image concerns rather than tangible financial risks. In a press release issued on Monday, the central bank announced it is seeking public feedback on a proposed rule that would codify a policy change first directed internally in June 2023.
The June 2023 directive instructed Fed supervisors to cease pressuring banks to terminate relationships with customers over “reputation risk.” Under the new formal proposal, banks would be permitted to make account closure or denial decisions solely on the basis of financial risk management, aligning supervisory expectations with existing anti-discrimination laws.
Fed Officials Cite “Troubling Cases” of Debasing
Michelle Bowman, the Federal Reserve’s Vice Chair for Supervision, directly addressed the rationale behind the proposal. “We have heard troubling cases of debasing—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,” Bowman stated. She emphasized that such discrimination has no place in the Fed’s supervisory framework, noting it is explicitly unlawful.
The public comment period for the proposed rule is open for 60 days, allowing industry stakeholders, advocacy groups, and the public to submit formal feedback before the Fed finalizes the regulation.
Industry and Crypto Advocates Praise the Move
The proposal was immediately welcomed by prominent figures in the digital asset space. Senator Cynthia Lummis, a long-time advocate for pro-crypto policy, praised the initiative on social media platform X. “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, attaching the Fed’s announcement.
Source: Cynthia Lummis
Alex Thorn, Head of Firmwide Research at Galaxy Digital, also expressed support via X, noting that the “chokepoint 2.0 rollback continues.” The term “Operation Chokepoint 2.0” has been adopted by many in the cryptocurrency industry to describe what they allege was a coordinated effort, primarily during the Biden administration, to restrict crypto firms’ access to traditional banking services through regulatory pressure on banks.
Broader Political Push Against “Debasing”
The Fed’s action aligns with a broader political effort to address claims of debasing. Former President Donald Trump’s administration had previously explored an executive order in August to direct bank regulators to investigate debasing allegations, particularly from crypto firms and conservative groups, and to rescind policies enabling account closures based on reputational concerns.
Trump himself is currently involved in a high-profile $5 billion lawsuit against JPMorgan Chase, alleging the bank unlawfully closed his personal and business accounts for political reasons following the January 6, 2021, Capitol riots. While JPMorgan has contested the lawsuit’s merits, a former bank executive reportedly testified in court that the account closures were directly linked to the events of January 6, lending credence to the concerns about political motivations in banking decisions.
By moving to formalize its 2023 guidance, the Federal Reserve aims to create a clear, enforceable standard that separates legitimate financial risk assessment from subjective reputational considerations, a change proponents argue is essential for ensuring fair access to the financial system for all lawful businesses, including those in the emerging digital asset sector.
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