Fed to no longer police 'reputational risk' in banks

By Pete Schroeder

WASHINGTON (Reuters) -The Federal Reserve announced on Monday it was directing its supervisors to no longer consider "reputational risk" when examining banks, scrapping a metric that had been a focus of industry complaints.

The Fed said in a statement it was removing references to that risk in its supervisory manuals and other documents, and directing examiners to focus on specific financial risks. The Fed had defined reputational risk as the potential for negative publicity to hurt a bank's business or lead to costly litigation.

The Fed joins other U.S. bank regulators -- the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation -- in moving to drop that examination standard. Banks had complained that policing that sort of risk can lead to examiners dinging banks for matters that may be legal and not financially risky, and can lead to subjective judgments by supervisors on what bank activities are suitable.

The Fed clarified in its statement that it still expects banks to have robust risk management. It also said the announcement does not preclude banks from considering reputational risk themselves when making decisions.

(Reporting by Pete Schroeder; Editing by Chris Reese and Leslie Adler)