Fed Moves to Permanently Drop ‘Reputational Risk’ From Bank Supervision

The Federal Reserve has opened a two-month comment period on a proposal to permanently codify the removal of “reputational risk” from its bank supervision rules, the most binding step yet in a sweeping regulatory rollback that crypto advocates say puts Operation Choke Point 2.0 to bed.

The move follows a last year announcement that the term would no longer factor into bank supervision and would instead be replaced with a focus on “material financial risks.”

 “This vague and inherently subjective standard has introduced unnecessary variability into supervisory approaches and diverted focus from core, measurable financial risks such as credit, liquidity, and market risk that most directly affect the safety and soundness of financial institutions,” Vice Chair for Supervision Michelle Bowman said in a statement on Tuesday.

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

Senator Cynthia Lummis (R-WY), who last year displayed the Fed’s “Account Access Implementation Handbook” at a Senate Banking hearing to show how reputational risk was used against crypto firms, said the proposal is long overdue.

“It’s not the Fed’s role to play both judge and jury for banking digital asset companies,” she posted on 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.”

Sudhakar Lakshmanaraja, founder of Web3 policy body Digital South Trust, told Decrypt the proposal was a necessary corrective, but cautioned that informal pressure alone was never the whole picture. 

“Banks are cautious about crypto not only due to AML compliance and volatility, but because crypto payment rails and stablecoins can challenge core banking economics like deposits and payments,” he said. 

Lakshmanaraja said Congress should “settle this through clear crypto market structure and stablecoin legislation such as the CLARITY Act and the GENIUS Act,” so lawful businesses get predictable banking access rules instead of “discretionary supervisory signals.”

“Basic banking services should not be weaponised against any lawful industry based on institutional interests and informal pressure,” he said.

The comment period announcement lands days after JP Morgan Chase acknowledged for the first time that it closed President Donald Trump’s accounts after the January 6, 2021, attack on the U.S. Capitol, according to a recent AP News report.

Trump is suing JP Morgan for $5 billion over the allegedly politically motivated account closures, as Fox Business’ Charles Gasparino noted multiple banks acted under OCC “reputational risk” pressure.

Last August, Trump signed an executive order directing federal banking regulators to adopt policies preventing “politicized or unlawful debanking,” with the White House stating the administration had “ended Operation Chokepoint 2.0 once and for all.” 

Earlier this month, the FDIC settled a separate FOIA lawsuit brought at Coinbase’s direction, agreeing to pay $188,440 in legal fees after a court found the agency had “violated FOIA” by categorically withholding dozens of crypto “pause letters,” documents that showed banks were pressed to halt or limit crypto activity during the Biden era. 

Under the settlement, the FDIC also pledged to revise FOIA training materials and declared it would no longer maintain a blanket policy of categorically withholding bank supervisory documents.

The Fed’s public comment window closes within 60 days, after which a final rule is expected to be published in the Federal Register.