The Federal Reserve announced on 23 June 2025 that it is removing reputational risk as a component of its supervisory rating assessments of United States banks, replacing examiner judgements about public perception and image with a framework grounded in more objective and quantitative criteria. The decision, set out in a press release published on the Fed's website, represents a meaningful and deliberate shift in how the central bank approaches the examination of American financial institutions and the factors it considers when assigning supervisory ratings.
Reputational risk — broadly understood as the risk that adverse public perception of a bank could affect its ability to attract customers, counterparties, or funding — has been a component of bank supervisory frameworks in the United States for a number of years. Its inclusion in examination processes gave supervisors a degree of discretion to weigh qualitative factors such as a bank's associations with controversial clients or industries, adverse media coverage, or the committee's broader view of management culture and public standing. The concept has been increasingly contested by banks and their representatives, who have argued that its application is inherently subjective and susceptible to inconsistency between different examination teams.
SHIFT TOWARDS QUANTITATIVE SUPERVISORY STANDARDS
By removing reputational risk from the examination framework, the Federal Reserve is signalling a preference for supervisory assessments anchored in verifiable and measurable indicators. The areas of bank examination that will continue to form the core of supervisory ratings — capital adequacy, asset quality, management effectiveness, earnings, liquidity, and sensitivity to market risk — are all domains where evidence-based assessment is more straightforward and where a bank's performance can be evaluated against defined benchmarks and historical data. The elimination of reputational risk narrows the scope for examiner discretion in a dimension that had been a persistent source of tension between supervisors and the industry.
The change has practical implications for how large and mid-sized banks manage their relationships with supervisors. Under the previous framework, institutions had reason to consider carefully how their client relationships, business activities, and public communications might be perceived and factored into examination outcomes. That particular consideration will no longer be relevant to supervisory ratings, focusing the supervisory dialogue more narrowly on objectively measurable aspects of a bank's financial condition and operational management.
CONSISTENT WITH BROADER DEREGULATORY DIRECTION
The Fed's decision is consistent with a broader orientation towards reduced regulatory discretion and more rule-based supervision that has been evident across multiple areas of US financial regulation in recent months. The change aligns with a direction of travel under current Fed leadership that seeks to ensure supervisory expectations are clearly defined, consistently applied, and grounded in observable evidence rather than examiner judgement on matters of reputation or public perception. Several other adjustments to supervisory and regulatory frameworks have been made or proposed in a similar spirit.
The announcement has been welcomed in parts of the banking industry, particularly among institutions that have argued the reputational risk framework was applied in ways that penalised them for client relationships or business activities that were entirely legal and compliant with applicable regulations. How the practical effect of the change manifests across the examination process, and whether it shifts the behaviour of banks in their client selection or risk appetite, will become clearer as the new approach is applied during upcoming examination cycles. The Fed has indicated that the change takes effect immediately for supervisory purposes.