The NCUA has issued a Notice of Proposed Rulemaking to codify the elimination of reputational risk from its supervisory program, becoming the latest federal financial regulator to do so.
“NCUA has determined that assessing reputation risk is subjective, ambiguous, and lacking in measurable criteria,” the agency said, in announcing the action. “The proposed rule is intended to ground NCUA’s supervision and examination programs in data-driven conclusions to eliminate the risk of individual perspectives driving the supervisory process.”
Comments on the proposal are due by December 22.
The agency said that reputational risk has been evaluated as part of the NCUA’s examination and supervision program for decades. However, the agency said it has not seen evidence that reputational risk is a primary driver of unsafe or unsound practices or that it poses a material risk to the NCUA’s Share Insurance Fund.
“Reputation risk is ambiguous and lacks measurable criteria, which leaves it too open to interpretation,” according to the NCUA As a result, the agency’s supervision for reputational risk could reflect an individual’s perspectives, rather than data-driven conclusions.
In outlining the rule, the NCUA said that credit union management generally is in the best position to identify the business decisions that will positively influence the membership’s perception or opinion of the credit union.
The NCUA said that if credit union officials alter their behavior based on supervisory expectations related to reputational risk management, they are forgoing an opportunity to maintain or build a productive relationship within the credit union’s field of membership.
The FDIC and the OCC already have approved the joint publication of a Notice of Proposed Rulemaking that would codify the removal of reputational risk from their supervisory programs.
In response to President Trump’s August 7 Executive Order, “Guaranteeing Fair Banking for All Americans,” the NCUA proposed rule also would prohibit NCUA from requiring or encouraging a credit union to close accounts or take other actions “on the basis of a person’s or entity’s political, social, cultural or religious views or beliefs, constitutionally protected speech, or on the basis of politically disfavored but lawful business activities perceived to present reputation risk.”