Publication Date

2019

Abstract

In the aftermath of a school shooting in Florida the New York State bank regulator urged banks to manage the "reputation risk" posed by doing business with the National Rifle Association a gun rights advocacy group As part of Operation Choke Point a federal regulator told banks to end relationships with payday lenders because those activities posed "reputation risk" Another federal regulator warns banks their reputations might be damaged by lending to oil and gas companies that are perceived to cause environmental harm Reputation risk is the risk that bank stakeholders will negatively change their perception of the bank It was almost unmentioned in banking regulation until the mid1990s but as these examples illustrate it is now ubiquitous brbrThis Article surveys reputation risk guidance and enforcement efforts It shows 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 hotbutton political topics afield from bank safety and soundness like gun rights payday lending and fossil fuels Because regulators believe reputation risk is present in every facet of banking little prevents them from using it to address other controversies brbrThis Article argues expansive regulation of reputation risk is harmful There is little evidence that regulators 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 correspondingly erodes trust in banksbr

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