OCC Eliminates Reputation Risk Examinations for Banks

The Office of the Comptroller of the Currency announced that it will no longer examine banks for reputation risk and is removing references to reputation risk from its Comptroller’s Handbook booklets and guidance issuances. This move comes at a time in which the OCC has received complaints about the examination’s subjectiveness and misuse.

The OCC said that it has directed its examiners and staff to cease screening banks for reputation risk which refers to the risk of potential scandals or any other type of negative publicity that can possibly emerge and negatively impact a bank’s business. The OCC expressed its disagreement with the examination as it placed too much judgmental and discretionary power in the hands of the examiners. Rather, it believes that more focus should be placed on more “transparent risk areas.”

“The OCC’s examination process has always been rooted in ensuring appropriate risk management processes for bank activities, not casting judgment on how a particular activity may fare with public opinion,” said Acting Comptroller of the Currency Rodney Hood. “The OCC has never used reputation risk as a catch-all justification for supervisory action. Focusing future examination activities on more transparent risk areas improves public confidence in the OCC’s supervisory process and makes clear that the OCC has not and does not make business decisions for banks.”

The OCC believes that by getting rid of reputation risk it will maintain strong risk management as well as fair customer treatment. The agency perceives the removal of such an risk assessment will ensure transparency and accountability within the OCC’s operations. According to the agency, the limitation of subjectiveness within the examination will enable the OCC to create a more effective regulatory environment.

OCC’s Move Receives Support From Banking Industry

This move has received much support from the banking industry. Financial Services Forum President and CEO Kevin Fromer called the OCC’s actions an “important step to create a more transparent and effective regulatory environment.” Greg Baer, president and CEO of the Bank Policy Institute added support to the agency’s actions in stating “Bank exams should be transparent and grounded in objective legal standards. This marks meaningful progress in refocusing oversight on material financial risk, rather than reputational risk, operational risk, corporate governance, vendor management and other matters that do not pose a material threat to safety and soundness.”

The OCC emphasized that while it is removing an aspect of the examination it will continue to regulate in a strict and efficient manner. “The removal of references to reputation risk from OCC handbooks and guidance issuances does not alter the OCC’s expectation that banks remain diligent and adhere to prudent risk management practices across all other risk areas,” according to its press release. “The OCC expects to complete its efforts to update its public documents in the coming weeks.”