US takes firm stand to eliminate reputational risk in banking, stirring debate in South Africa

THE United States has ignited a debate that South African banking authorities have been shying away from for a while by taking a firm grip on banks hav-ing 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 Fed-eral Deposit Insurance Corporation (FDIC) was going to eliminate the use of reputational risk as a component of bank supervision.

This followed the Committee's pas-sage 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 Presi-dent Donald Trump's family organi-sations 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 busi-nesses or individuals due to concerns about reputational risk.