US stand on 'reputational risk' in banking stirs debate in SA

THE United States has ignited a debate that South African banking institutions have been staying away from for quite by taking a firm stance on banks having the power to foreclose those the accounts of pro-democracy groups and politically exposed individuals based on “reputational risk”.

- SIPHELELE DLUDLA

The US Banking Committee this week announced that the Federal Deposit Insurance Corporation (FDIC) are going to eliminate the use of reputational risk as a component of bank supervision.

This followed the committee’s passage of Senator Tim Scott’s Financial Institution and Regulatory Management (FIRM) Act which would codify the elimination of reputational risk across all federal banking regulators.

It also comes as two of US President Donald Trump’s family organisations have sued American banking giant, Capital One, for their decision to close their accounts after the US Capitol riots of January 2021. The Trump Organization describes the account closures as an attack on free speech and free enterprise, with the suit claiming that the decision was a response to Trump’s political views.

The FIRM Act aims to remove reputational risk as a component of federal financial regulation, potentially addressing issues like de banking which refers to financial institutions terminating relationships with businesses or individuals due to concerns about reputational risk.