What Is “Reputation Risk” in Banking Supervision and Why Are Regulators Trying to Remove It?

Key Takeaways

• US banking agencies have proposed rules to prohibit the use of “reputation risk” as a standalone basis for supervisory criticism or adverse action.
• The FDIC and OCC also propose a formal, risk‑based definition of “unsafe or unsound practice” tied to material financial harm or risk to the Deposit Insurance Fund.
• New rules would restrict MRAs to issues that could reasonably become unsafe or unsound or that violate banking laws, narrowing their scope.
• The Federal Reserve has already begun removing “reputational risk” from its examination programs and refocusing on specific financial risks.​
• Together, these moves are meant to make supervision more predictable, transparent and anchored in statutory and prudential standards rather than subjective reputation judgments.

Reputation Risk in Bank Supervision

In traditional bank supervision, reputation risk referred to the risk that negative public opinion could harm a bank’s franchise or access to funding. Regulators now say the concept is too vague and subjective, and propose prohibiting its use as a standalone basis for criticism or adverse action in favour of specific, measurable financial risks.

Unsafe or Unsound Practice

Under the joint FDIC–OCC proposal, an unsafe or unsound practice would be defined by rule as a practice, act or failure to act that is contrary to generally accepted standards of prudent operation and is likely to materially harm the institution or pose a material risk to the Deposit Insurance Fund.

Matters Requiring Attention (MRAs)

Matters Requiring Attention (MRAs) are supervisory findings that require a bank’s management or board to address identified weaknesses or violations. Under the proposal, agencies “may only” issue MRAs where a practice could reasonably be expected to become unsafe or unsound under current or foreseeable conditions, or where there is an actual violation of law or regulation.

Statutory Authority and Section 8 FDIA

The proposed definition of unsafe or unsound practice would apply specifically to enforcement actions under section 8 of the Federal Deposit Insurance Act (12 U.S.C. § 1818). By interpreting this statutory authority in rule, the FDIC and OCC aim to clarify when supervisory concerns rise to the level of formal enforcement based on safety‑and‑soundness risk.

Enforcement vs Supervisory Actions

Supervisory actions include exams, ratings and MRAs that guide a bank’s risk management, while enforcement actions are formal orders, penalties or other remedies under specific statutes. The proposals clarify that MRAs and supervision should address practices with a clear safety‑and‑soundness nexus, leaving enforcement tools for more serious or persistent issues.

What Are Regulators Doing with “Reputation Risk”?

In October 2025, the federal banking agencies issued a joint notice of proposed rulemaking that would prohibit the use of reputation risk as a standalone basis for supervisory criticism or adverse action. The proposal would also bar regulators from requiring, instructing or encouraging banks to close accounts or take other actions based on customers’ political, social, cultural or religious views, constitutionally protected speech, or politically disfavoured but lawful business activities perceived to pose reputation risk.

The FDIC staff memo acknowledges that agencies never clearly explained how banks should measure reputation risk and that supervision based on it has been inconsistent and at times driven by “individual perspectives rather than data‑driven conclusions”. This reform responds in part to concerns raised in Executive Order 14331, “Guaranteeing Fair Banking for All Americans”, about potential misuse of reputation‑risk justifications.

How “Unsafe or Unsound Practice” Would Be Redefined

Separately, the FDIC and OCC have proposed, for the first time, a rule‑based definition of “unsafe or unsound practice” for purposes of enforcement under section 8 of the FDIA. The definition would anchor the term in:​

• Consistency with generally accepted standards of prudent operation.
• A requirement that the conduct is likely to materially harm the institution or pose a material risk of loss to the Deposit Insurance Fund.

The same proposal would also set minimum requirements for issuing MRAs, limiting them to practices that either could reasonably be expected to become unsafe or unsound under current or foreseeable conditions, or that constitute actual violations of banking laws or regulations. This is intended to narrow MRAs to issues with a clear safety‑and‑soundness nexus.

What Cannot Be Based on Reputation Risk Anymore?

Under the joint reputation‑risk proposal, agencies would be expressly prohibited from:

• Criticising or taking adverse supervisory action against an institution on the basis of reputation risk alone.
• Requiring, instructing or encouraging banks to terminate or restrict services to customers based on political, social, cultural or religious views or constitutionally protected speech.
• Acting solely on the basis of politically disfavoured but lawful business activities that some perceive as reputation‑risky.​

Agencies would instead be expected to focus on specific financial risks—credit, liquidity, operational, legal and compliance—supported by evidence and linked to prudential standards. The Federal Reserve has already begun reviewing and removing references to reputational risk from its supervisory materials and training examiners to replace them with more specific financial‑risk discussions.​

Old vs New Approaches to Reputation and Safety‑and‑Soundness

Dimension	Old Approach (Implicit Reputation Risk)	Proposed Risk‑Based Approach
Reputation risk concept	Broad, subjective and often undefined in statute or regulation	Prohibited as a standalone basis for criticism or adverse action
Basis for MRAs	Wide range of concerns, sometimes loosely tied to prudential standards​	MRAs limited to issues that could become unsafe or unsound, or violate law​
Unsafe or unsound	Case‑law and guidance based, no single binding definition​	Defined by rule as prudentially unsound conduct likely to cause material harm​
Supervisory vs enforcement	Boundaries less clear; reputation‑risk language used in both contexts	Clearer separation; enforcement anchored in section 8 FDIA standards​

A Simple Framework for Banks Navigating the Shift

1. Re‑map your risk taxonomy
   Align internal frameworks with regulators’ focus on material financial risks (credit, liquidity, market, operational, legal) instead of generic reputation risk labels.
2. Re‑underwrite MRAs
   For each existing or potential MRA, identify whether it clearly meets the proposed standard: a realistic path to becoming unsafe or unsound, or an actual law or rule violation.
3. Clarify supervisory vs enforcement pathways
   Distinguish issues suitable for supervisory remediation (MRAs, board reporting) from those that could rise to formal enforcement under section 8 FDIA, based on the new definition of unsafe or unsound practice.​
4. Strengthen documentation and supervisory record
   Ensure that risk assessments and responses are well‑documented, data‑driven and explicitly tied to prudential standards, not to reputation narratives.
5. Update policies on account closures and customer selection
   Review policies to make sure decisions about customer relationships are based on legal, credit, AML/CFT and operational considerations, not on political or social views, in line with the proposed prohibition.

FAQ: Reputation Risk, Unsafe or Unsound Practices and MRAs

What happens to “reputation risk” under the new proposals?
If finalised, regulators would be barred from criticising or taking adverse action against banks based on reputation risk alone, and would instead have to ground supervisory findings in specific, demonstrable financial risks.

Does this mean regulators ignore reputational issues altogether?
Not exactly. Reputational events still matter when they create or signal material financial risks—for example, legal, liquidity or funding risks—but they must be analysed through those specific risk channels rather than as a free‑standing category.

How does the new definition of unsafe or unsound practice change enforcement?
By defining unsafe or unsound practice in terms of prudent‑operation standards and likely material harm, the rule clarifies when supervisory concerns can support enforcement under section 8 FDIA, making enforcement more predictable and legally grounded.

Will MRAs become less frequent?
MRAs may become more targeted, since agencies would “may only” issue them where an issue could reasonably become unsafe or unsound or involves an actual violation; lower‑impact or purely reputational concerns should be handled through other channels.

Sources

1. Agencies Issue Proposal to Prohibit Use of Reputation Risk by Regulators
2. Federal Banking Regulators’ Proposed Rulemakings on Reputation Risk and Unsafe Practices
3. Federal Reserve Board announces that reputational risk will no longer be a component of examination programs in its supervision of banks