Regulating Bank Reputation Risk

Today’s podcast show features a discussion with Julie Andersen Hill about her law review article titled “Regulating Bank Reputation Risk”, 54 GA. L. Rev. 523 (2023). Professor Hill is the Dean and Wyoming Excellence Chair of the University of Wyoming College of Law.

The abstract to Professor Hill’s article does an excellent job of summarizing her thesis:

This Article surveys reputation risk guidance and enforcement efforts. It shows that reputation risk regulation is usually an ancillary consideration to credit risk, operational risk, or other primary risk. In these instances, reputation risk adds little because regulators have strong tools to address the root problems. Sometimes, however, regulators justify guidance or enforcement primarily in terms of controlling reputation risk. Regulators use reputation risk to weigh in on hot-button political topics afield from safety and soundness like gun rights, payday lending and fossil fuels. Because regulators believe that reputation risk is present in every facet of banking, little prevents them from using it to address other controversies.

This Article argues that expansive regulation of reputation risk is harmful. There is little evidence that can accurately predict and prevent bank reputational losses. Moreover, because reputation risk is largely subjective, regulators can use it to further political agendas apart from bank safety and soundness. Unnecessary politicization of banking regulation undermines faith in the regulatory system and correspondently erodes trust in banks.

During our discussion, Professor Hill addressed the following issues:

• What is reputation risk?
• What legal authority do bank supervisors have to regulate reputation risk?
• Why do you believe that the regulation of reputation risk is unnecessary and harmful?
• What is Operation Choke Point all about and how did it turn out?
• What was the outcome in the U.S. Supreme Court in NRA v. Vullo of the New York State bank regulator urging state banks to manage the reputation risk posed by doing business with the National Rifle Association?
• Has concern over the regulation of reputation risk subsided in light of the termination of Operation Chokepoint and the unanimous Supreme Court opinion in NRA v. Vullo?
• Why does there appear to be renewed worry that regulators are using reputation risk and other justifications to force banks to cut services to people, businesses or industries that they don’t like?
• Is there any credence to the claims of Elon Musk and others that crypto and tech startups are being debanked or denied fair access to banking services?
• In light of the fact that President Trump himself and many members of Congress are troubled by debanking claims, what sort of policy changes are likely to be considered? What is the likelihood of the OCC promulgating a regulation prohibiting debanking in Trump 2.0 similar to the one it almost finalized in Trump 1.0?

The importance of this podcast is underscored by the fact that yesterday, the Senate Committee on Banking, Housing and Urban Affairs held a hearing entitled “Investigating the Real Impacts of Debanking in America.”

Alan Kaplinsky, Senior Counsel and former chair for 25 years of the Consumer Financial Services Group, hosts the discussion.