What happened?
The Federal Deposit Insurance Corporation (FDIC) has decided to eliminate “reputational risk” as a factor in bank supervision, following a similar move by the Office of the Comptroller of the Currency (OCC). This decision comes after the passage of the FIRM Act, led by Senator Tim Scott, which aims to remove reputational risk considerations from all federal banking regulators. The change is seen as a significant win for the crypto industry, as this criterion was often used to justify the debanking of lawful businesses, including those in the crypto sector.
Who does this affect?
This decision affects financial institutions, especially banks that have been using reputational risk as a metric to evaluate their business practices. It is particularly beneficial for the cryptocurrency industry, which has faced challenges and scrutiny under this criterion. Legal businesses that may have been unfairly targeted due to reputational concerns now have a better chance at accessing banking services without facing unjustified exclusions.
Why does this matter?
The removal of reputational risk as a supervisory factor could lead to increased financial stability and market participation by businesses previously sidelined due to subjective risk assessments. For the cryptocurrency market, this represents an opportunity for growth and broader integration with traditional financial systems. Overall, this move may encourage more transparent and predictable financial regulation, fostering innovation and investment across various sectors, including crypto.