US banking rules may affect South African banks over reputational risk closures

A LEGAL expert with deep knowledge of regulation of financial institutions has warned that the United States’ legislation against the closure of bank accounts due to reputational risks could see SA banks sanctioned if they close accounts of businesses in which US companies or individuals are invested.

- SIPHELELE DLUDLA

This comes as the US Banking Committee announced this week that the Federal Deposit Insurance Corporation (FDIC) will eliminate reputational risk as a factor in bank supervision, following the passage of Senator Tim Scott’s Financial Regulation and Management Improvement (FIRM) Act.

The FIRM Act aims to remove reputational risks as a component of federal financial regulation, potentially addressing issues like “debanking,” which refers to financial institutions terminating relationships with businesses or individuals due to concerns about reputational risk. The legislation aims to scrap this concept across all federal banking regulators.

In an interview with Business Report on Thursday, the legal expert who preferred to keep his anonymity said banks were “a law unto themselves” in the way they were arbitrarily using reputational risk. “Reputational risk has got no parameters, and they go to any level of calibration, take everything else that is legal, you’ve got to do something which might trigger something to get to the conclusion that something has happened,” explained the legal expert.

“That’s how our law functions.