Reputational risk is the possibility that negative public opinion or media coverage could harm a bank’s ratings in regulators’ examinations even when it follows the law

Quotes that support claims

For years, crypto companies in the United States have faced a frustrating problem. Even when fully legal and compliant, many found themselves locked out of traditional banking. The issue wasn’t fraud or instability. It was image. Banks were worried that working with crypto firms would hurt their reputation. That kind of risk, often vague and hard to define, could trigger extra scrutiny during exams. It discouraged banks from touching anything remotely controversial.

Reputational risk meant banks could get flagged by regulators even if they followed the law, just because something they did might upset the public or attract negative media. For years, banks complained that this rule was too vague and unfair. Now, the Fed’s new plan will remove all mentions of this risk from official manuals and documents used during inspections.