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

THE United States has ignited a debate that South African banking authorities have been shying away from for a while by taking a firm stance on banks having the power to arbitrarily close the accounts of cryptocurrency businesses and politically exposed individuals based on "reputational risk".

- SIPHELELE DLUDLA [e-mail]

The US Banking Committee this week announced that the Federal Deposit Insurance Corporation (FDIC) was 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 Integrity and Regulation 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 described 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 "debanking, which refers to financial institutions terminating relationships with businesses or individuals due to concerns about reputational risk.