Fed is Seeking Feedback on Proposal to Remove Reputation Risk from Banking

The US Federal Reserve is seeking to codify a rule removing “reputation risk” from banking supervision, which some have blamed for a wave of crypto debanking in recent years.

The Fed initially began making changes in June last year, announcing that it had directed its supervisors to stop pressuring banks to shut down client accounts over reputation risk, meaning banks can only make decisions on clients based on financial risk management. 

In a press release on Monday, the Fed said that it is requesting feedback on a proposal to turn this into law. The Fed has set a 60-day deadline for submitting comments. 

“We have heard troubling cases of debanking — 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,” said vice chair for supervision Michelle Bowman.  

“Discrimination by financial institutions on these bases is unlawful and does not have a role in the Federal Reserve’s supervisory framework,” she added.

In an X post on Monday, Lummis praised the move, adding that it is “not the Fed’s role to play both judge and jury for banking digital asset companies.”

“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.”

Galaxy Digital’s head of firmwide research, Alex Thorn, also praised the move, noting via X on Monday that “chokepoint 2.0 rollback continues.”

Operation Chokepoint 2.0 is a term used by many in the crypto industry to describe what they felt was a coordinated effort by the Joe Biden-led US government and banking sector to cut crypto firms off from using traditional banking services. 

The current US administration has made a concerted push to end debanking in the US, with US President Donald Trump initially exploring a draft order in August to direct bank regulators to investigate debanking claims from crypto firms and conservatives. 

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It also sought to direct bank regulators to scrap any policies that led banks to cut ties with such clients due to reputational risk.

Trump himself is currently in a $5 billion legal stoush with JPMorgan over debanking, alleging that the firm unlawfully closed his accounts for political reasons back in 2021.