There is a major shift happening in the Federal Register this week regarding how the Fed and the OCC handle "Reputation Risk." For years, banks have been able to "de-bank" certain industries—like firearms, fossil fuels, or crypto—by claiming that keeping them as clients would hurt the bank's reputation.
The government is now moving to ban that practice, forcing banks to focus strictly on a client's "Safety and Soundness" (the cold, hard numbers) rather than how controversial they might be.
My Take: The Hidden Risks of Forced Bipartisanship
I’ve been thinking about the "why" behind this, and I have a few concerns that aren't being talked about:
Reputation is a Real Risk: I don't buy the idea that reputation doesn't matter. If a bank is forced to take on a client that is highly controversial—say, a major lobbyist or a polarising organization—what happens when the bank's other customers get angry? We could see an inherent problem where people withdraw their funds in protest and move to a competitor. That is a real financial risk that a bank should be allowed to manage.
The Private Business Principle: At the end of the day, these are private companies with board oversight. The government shouldn't be in the business of telling a private entity who they must do business with unless there is something nefarious happening (criminal enterprises, discrimination, etc). A bank isn't a public utility; it's a business.
The "Boom" is Overblown: Don't expect a massive "crypto boom" just because a bank must do business with crypto companies. Most of these platforms have already found niche banks or smaller institutions to house their money. The bigger banks might see a slight bump in revenue, but the smaller guys have already been eating that lunch for a while.
The Market Outlook: Watch the Banking Sector
If this rule goes through, it changes the "Insider" leverage within the banking sector. Here is how it could hit your portfolio:
Revenue vs. Volatility: Banks that were previously "playing it safe" will now have a green light to onboard high-revenue clients (like major gun manufacturers or heavy-polluting energy firms). This could increase annual revenue and boost earnings per share (EPS) for mid-cap banks.
The "Moral" Bank Run: Keep an eye on the big consumer-facing banks (JPM, BAC). If they are forced into partnerships that alienate their customer base, keep a close watch on their deposit outflows. In a high-interest-rate environment, losing low-cost deposits because of a reputation hit is a recipe for a stock price slide.
Government Leverage: The government assists these banks when markets crash. This new rule could give the Feds more oversight into how banks operate their inner machinery. More government "assistance" could lead to more government "sway," which could lead to more volatility in the banking sector overall.
I want to hear from you...
Do you think a bank should be forced to be "bipartisan" even if it costs them customers? Or should a private company maintain their right to "fire" a client they think is bad for their image?
Banker's Choice
Source:
Federal Register Notice: 91 FR 9499 – Prohibition on Use of "Reputation Risk" or Other Supervisory Tools to Encourage or Compel Banking Organizations to Terminate Bank-Customer Relationships.