ATR Submits Comment Letter on Codifying Prohibition on Reputation Risk to Address Debanking

On March 25, 2026, Americans for Tax Reform submitted a comment letter regarding a notice of proposed rulemaking by the Federal Reserve board which would codify a prohibition on use of reputation risk in bank supervision practices. Reputation risk has been widely criticized as a major contributor to the phenomenon of debanking—a practice where financial institutions abruptly sever account access or terminate a commercial relationship with their customers, often with no justification given.  

ATR supports the Fed’s move to codify this prohibition. Reputation risk has been documented as a key tool for regulators to target certain industries and individuals ranging from crypto, oil & gas, to firearms businesses, and even charities and political organizations. The weaponization of reputation risk dates back to the 1990s, but it was not until the Obama Administration that debanking proliferated. Under Operation Choke Point, regulators used thinly-veiled threats and informal guidance to pressure banks to cease commercial relations with industries that were politically disfavored. A similar abuse of agency power occurred under the Biden administration through its crackdown on the crypto industry. The common denominator underlying these abusive exercises of government power is the reference to reputation risk that regulators frequently cited as justification for compelling banks to penalize otherwise compliant, law-abiding customers.  

Aside from the strong potential for, and history of, abuse and overreach, reputation risk also fails key tests that support its inclusion as an effective and reasonable tool for bank supervision more broadly. 

For one, reputation risk lacks legal justification: 

The Administrative Procedure Act (APA) of 1946 and recently established doctrine in Loper Bright Enterprises v. Raimondo make it clear agencies must adhere to their responsibilities as specifically outlined by relevant statutes.6 Federal agencies may not self-endow interpretive authority when administering ambiguous statutes. Agencies must point to clear explicit congressional authorization when formulating rulemaking. The Federal Reserve Board cannot expand the scope of bank supervision practices unilaterally without an update in legislative authority. With regards to bank supervision, each component of CAMELS is traceable to explicit statutory authority: 

• Capital Adequacy — 12 U.S.C. § 1831o (Prompt Corrective Action)  

• Asset Quality — 12 U.S.C. § 1831p-1 (Safety-and-Soundness Standards) 

• Management — 12 U.S.C. § 1818 (Termination of Status as Insured Depository Institution) 

• Earnings — 12 U.S.C. § 1831o (Prompt Corrective Action)  

• Liquidity — 12 U.S.C § 5365; C.F.R. 249.10 (LCR rules) 

• Sensitivity to Market Risk — 12 U.S.C § 5365; (Enhanced Supervision) related to stress testing requirements 

These categories reflect responsibilities that Congress explicitly assigned to banking regulators. They measure financial condition and operational soundness — the precise objectives of banking statutes. Reputation risk has no identifiable statutory basis that regulators can use to justify its adoption. Reputation risk entered supervisory practice in 1995 via guidance and not notice and comment rulemaking.13 Therefore, the continued use of reputation risk violates the APA’s requirement that agency action be grounded in Congressionally delegated authority. 

The letter also questions the efficacy of reputation risk and argues that any signal from reputation risk could only serve as a lagging indicator for risk signals that are already embedded elsewhere in CAMELS: 

There is confusion over the cause and effect during such events — namely — material financial risks create financial issues that create the news which affects the institution’s reputation. Financial distress does not occur because of reputation risk, rather, reputation risk follows financially distressing events. Events such as the global financial crisis, the collapse of SVB and regional banks in 2023 began due to financial reporting that stoked concern among depositors and investors. Silicon Valley Bank’s collapse began with a credit downgrade from Moody’s following an announcement to sell common and preferred stock to address deposit outflows. Wall Street banks that collapsed during the Global Financial Crisis reported increasing losses on mortgages and Mortgage-Backed Securities for several months preceding their collapse. However, public signs of financial distress such as news of buyout discussions by other institutions likely prompted and accelerated the bank runs into a compressed timeline of a few days. 

While the issue of bank collapses is concerning; these cases are not causal proof of reputation risk precipitating these collapses. Secondly, because reputation risk occurs in the wake of periods of financial distress, it is inconceivable that regulators can issue timely warnings or incentivize banks to fix their perception by investors or their customer base. Doing so requires an overhaul of the bank’s balance sheet and increases in capitalization, emergency liquidity access, or other tools to remediate the underlying issue that belie the bank — these are measures best addressed through existing CAMELS channels excluding reputation. 

The letter concludes by urging the agency to follow through with its proposal:  

Americans for Tax Reform strongly encourages the Federal Reserve Board to move as quickly as possible to codify the removal of reputation risk from all supervision materials activities. Preventing reputation risk from being hijacked for political objectives will signal commitment from the Federal Reserve Board as a regulator to carry out its role in an impartial manner and ensure bank supervision achieves its objectives without incentivizing discriminatory practices such as debanking.