The proposals align with Trump administration policy by emphasizing supervision of material and quantifiable financial risks.
On October 7, 2025, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) issued two joint Notices of Proposed Rulemaking (collectively, the Proposals) in an effort to concentrate bank supervision on material financial risks and eliminate reputation risk as a supervisory factor.
- The Material Risks Proposal would revise the supervisory framework by formally defining the term “unsafe or unsound practice” and establishing a uniform standard for “Matters Requiring Attention” (MRAs).
- The Reputation Risk Proposal would eliminate reputation risk as a factor in bank supervision, focusing supervisory program efforts on data-driven and measurable risks such as credit and liquidity risks.
The Proposals follow the OCC’s September 2025 bulletins (Bulletins 2025-22 and 2025-23) aimed at eliminating unlawful debanking in the federal banking system (see this Latham blog post). Like Bulletins 2025-22 and 2025-23, the Proposals are a response to key directives in the August 7, 2025, Executive Order “Guaranteeing Fair Banking for All Americans” (the Order) (see this Latham blog post).
The Order is premised on the principle that “the provision of banking services should be based on material, measurable, and justifiable risks.” It therefore called for bank regulators to update all financial institution guidance documents, manuals, and other materials (not otherwise subject to notice-and-comment rulemaking) to remove the use of reputation risk (or equivalent concepts) that could result in politicized or unlawful debanking. The Order also directed financial institutions to ensure that all decisions to provide or deny service are “made on the basis of individualized, objective, and risk-based analyses,” rather than political or religious beliefs or engagement with disfavored but otherwise lawful business activities.
The Proposals will be open for public comment for 60 days after publication in the Federal Register.1
The Material Risks Proposal
The agencies are tasked with enforcement and supervisory powers to ensure that supervised institutions and their affiliates refrain from engaging in practices deemed unsafe or unsound. However, there is currently no formal statutory or regulatory definition for what constitutes an unsafe or unsound practice, which the Material Risk Proposal views as leading to a lack of consistency and clarity in enforcement and supervision. The Material Risks Proposal seeks to remedy this by establishing a uniform definition for the term “unsafe or unsound practice” for purposes of section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818).
An unsafe or unsound practice would be defined as a practice, act, or failure to act, alone or together with other practices, acts, or failures to act, that:
- Is contrary to generally accepted standards of prudent operation; and
- Either
- If continued, is likely to
- Materially harm the financial condition of an institution; or
- Present a material risk of loss to the Deposit Insurance Fund (DIF); or
- Materially2 harmed the financial condition of the institution.
The agencies’ enforcement and supervisory authority under 12 U.S.C. 1818 would, therefore, be prospectively narrowed to reduce supervisory attention on “policies, process, documentation, and other nonfinancial risks.” However, the definition would not apply to the agencies’ rulemaking activities or authority.
FDIC Acting Chair Travis Hill said in a statement that examiners must prioritize material risks instead of “a litany of process-related items that are unrelated to a bank’s current or future financial condition.” This statement echoes the sentiment in his January 10, 2025, remarks on FDIC policy issues (for more information, see this Latham blog post).
The Material Risks Proposal would also establish uniform standards for when and how the agencies may communicate MRAs and non-binding supervisory observations as part of the examination process. It would establish that the agencies may only issue an MRA for a practice, act, or failure to act, alone or together with one or more other practices, acts, or failures to act, that:
- is contrary to generally accepted standards of prudent operation; and
- if continued, could reasonably be expected to, under current or reasonably foreseeable conditions,
- materially harm the financial condition of the institution; or
- present a material risk of loss to the DIF; or
- has already caused material harm to the financial condition of the institution; or
- is an actual violation of a banking or banking-related law or regulation.
MRAs would not be issued for potential violations of banking and consumer financial protection laws or minor policy or procedural deficiencies with respect to an institution’s policies, procedures, or internal controls unless they independently meet the definitional threshold.
The Material Risks Proposal would provide for tailoring of agency supervisory and enforcement actions, as well as MRA issuances, “based on the capital structure, riskiness, complexity, activities, asset size, and any financial risk-related factor that the agencies deem appropriate.” This tailored approach seeks to ensure that supervisory and enforcement actions are effective, proportionate, and relevant to the specific circumstances of each institution, rather than a one-size-fits-all regulatory framework that can be overly burdensome for some banks and insufficient for others. It also allows agencies to focus their resources on managing areas of greatest financial risk, resulting in “lower volumes of examination findings” and attendant compliance burdens for institutions.
FDIC Acting Chair Hill also noted that as part of its “goal of reforming supervision,” the FDIC is reviewing potential revisions to its existing manuals, rules, guidance, and internal supervisory procedures, and reforms to the CAMELS rating system (a financial rating methodology used by regulators to evaluate the safety and soundness of financial institutions).
The Material Risks Proposal contains 26 questions open for public feedback on all aspects of the proposed rule, including the definition and application of the term “unsafe or unsound practices”; the appropriateness and scope of terms like “materially,” “likely,” and “harm” in assessing the magnitude and probability of risks; whether quantitative measures should be used to define “material harm”; the standards for issuing MRAs, including their relationship with CAMELS ratings and the appropriate timeframes for remediation; tailoring supervisory actions to the specific characteristics of different institutions, such as community banks; the interaction of the proposed changes with existing safety and soundness standards; and potential modifications to examination manuals, regulations, and internal procedures.
The Reputation Risk Proposal
The agencies state at the outset that bank regulators using the concept of reputation risk as a basis for supervisory criticisms “increases subjectivity in banking supervision without adding material value from a safety and soundness perspective.”
To refocus regulatory efforts on addressing tangible financial risks that directly impact a bank’s safety and soundness, the Reputation Risk Proposal would prohibit the agencies from criticizing or taking adverse action against an institution on the basis of reputation risk. It would also “prohibit the agencies from requiring, instructing, or encouraging an institution or an employee of an institution to terminate a contract with, discontinue doing business with, or modify the terms under which it will do business with a person or entity on the basis of the person’s or entity’s political, social, cultural, or religious views or beliefs, constitutionally protected speech, or solely on the basis of the third party’s involvement in politically disfavored but lawful business activities perceived to present reputation risk.”
Reputation risk would be defined as “any risk, regardless of how the risk is labeled by the institution or regulators, that an action or activity, or combination of actions or activities, or lack of actions or activities, of an institution could negatively impact public perception of the institution for reasons not clearly and directly related to the financial condition of the institution.”
However, the prohibition on reputation risk would not affect:
- the ability of an institution to make business decisions regarding its customers or third-party arrangements and to manage them effectively, consistent with safety and soundness and compliance with applicable laws;
- requirements intended to prohibit or reject transactions or accounts associated with Office of Foreign Assets Control-sanctioned persons, entities, or jurisdictions; or
- the agencies’ authority to enforce reporting on certain monetary transactions under the Bank Secrecy Act (31 USC 53), which provides the legal framework for reporting monetary transactions to combat financial crimes such as money laundering and terrorist financing.
The Reputation Risk Proposal contains 16 questions open for public feedback on all aspects of the proposed rule, including on refining the definitions and scope of “reputation risk,” “adverse action,” and other phrasing; whether the prohibitions and definitions are clear and comprehensive; and if additional prohibitions or clarifications are needed. They also invite suggestions for potential alternatives to the proposal, ways to prevent evasion of its requirements, and insight into costs, benefits, effects, and potential unintended consequences of the proposal.
FDIC Acting Chair Hill added in a statement that “activities that might threaten a bank’s reputation in a manner that could impact its safety and soundness do so through traditional risk channels (such as credit risk, liquidity risk, or market risk, among others) that supervisors already focus on.”
The Reputation Risk Proposal formalizes previous announcements by the OCC, FDIC, and the Board of Governors of the Federal Reserve System (FRB), to advance the administration’s policy to eliminate reputational risk from the bank supervisory process. Specifically:
- March 20, 2025: the OCC announced that it was no longer examining its regulated institutions for reputation risk and was “removing references to banks’ reputation risk from its Comptroller’s Handbook booklets and guidance issuances.”
- April 8, 2025: FDIC Acting Chairman Hill announced that the FDIC was “working on a rulemaking related to reputational risk that would prohibit FDIC supervisors from criticizing or taking adverse action against institutions on the basis of reputational risk.”
- June 23, 2025: the FRB announced that reputation risk will no longer be a component of examination programs in its supervision of banks and issued a revised version of its “Guidelines for Rating Risk Management at State Member Banks and Bank Holding Companies,” removing all references to reputation risk.
Relatedly, FDIC Acting Chair Hill also highlighted that “the FDIC is announcing the removal of references to reputation risk from [FDIC] guidance, policy documents, and examination manuals,” and “expect[s] to continue working with the other federal banking agencies to remove references to reputation risk from interagency guidance and policy documents.”
Conclusion
By defining the term “unsafe or unsound practice,” establishing uniform standards for MRAs, and eliminating the use of reputation risk, the Proposals aim to reduce regulatory ambiguity for both examiners and supervised institutions. Further, they aim to ensure that supervisory actions are based on tangible and data-driven criteria rather than subjective or non-financial concerns. Therefore, minimizing subjective enforcement actions and scrutiny of minor procedural matters could mean a reduced regulatory burden for supervised financial institutions.
Critics argue that the proposed changes could “put blindfolds on bank supervisors” and limit examiners’ ability to address emerging risks and unethical practices that do not immediately affect a bank’s financial condition, potentially increasing the risk of bank failures and bailouts.
Despite this, the agencies are unified in their efforts to implement the directives in EO 1433. As FDIC Acting Chair Hill stated, “the federal banking agencies have been aligned in our efforts to refocus bank supervision on material financial risks and to eliminate politicized debanking.”
