Federal bank regulators are normally concerned with getting financial institutions to reduce their risk level, but the Trump Administration has a different idea. The major agencies—the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency—jointly announced they have revised key guidance documents to remove references to what is known as reputation risk.
This is the latest in a series of moves by the bank examiners to discourage banks from taking steps to limit potential harm to their business stemming from an association with controversial activities. More specifically, it is part of an effort pushed by Trump to ban what he and his supporters in Congress claim is a widespread practice of debanking.
The controversy stems in large part from reported steps taken by several major banks to dissociate themselves from Trump and his family businesses in the immediate wake of the January 6 insurrection. At that time, outrage about the siege of the Capitol was high, and the Trump name was toxic. It thus made sense that banks, along with other institutions, would want to sever their ties.
Trump is obsessed with rewriting the history of January 6, and part of that is to delegitimize actions such as those taken by the banks. It has now become part of MAGA doctrine that banks acted out of unjustified political discrimination.
This claim has been broadened beyond Trump to include supposed prejudice against other individuals and companies for ideological reasons. Based on this dubious premise, the bank regulators have been moving to obliterate the idea that financial institutions should be judged on potential risks to their reputation.
Reputation risk is far from a contrived issue. All of the major commercial and investment banks have severely compromised reputations. Some of this stems from their own misconduct, but numerous institutions have compounded the problem by doing business with disreputable parties.
For example, in 2014 JPMorgan Chase paid $1.7 billion to the Justice Department to settle criminal and civil charges stemming from its business dealings with fraudster Bernard Madoff. In 2020 the New York State Department of Financial Services fined Deutsche Bank $150 million for failing to properly monitor account activity conducted on behalf of sexual predator Jeffrey Epstein.
There are many more instances of banks being penalized in connection with suspicious activities by customers that were likely signs of money laundering. For instance, in 2024 TD Bank pleaded guilty to criminal charges of anti-money-laundering deficiencies and paid a penalty of $1.9 billion to the DOJ.
Major banks have also been penalized for doing business with parties that may be violating economic sanctions. In 2023 Wells Fargo paid $30 million to settle allegations by the Office of Foreign Assets Control that it provided a foreign bank located in Europe with software that the bank then used to process trade finance transactions with U.S.-sanctioned jurisdictions and persons.
In short, there are numerous ways in which financial institutions can damage their reputation by doing business with disreputable parties. At a time when banks should be more careful about the parties with whom they do business, the Trump regulatory agencies are pushing them in the opposite direction.
By removing reputation risk as one of the factors used in evaluating bank performance, the administration is making it more likely banks will abandon prudence in the pursuit of higher profits. As financial history shows, at some point this will not end well.
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