The U.S. banking sector is undergoing a significant regulatory pivot as the Trump administration directs agencies to remove “reputation risk” from their supervisory criteria. Traditionally used to assess whether a bank’s association with certain clients could harm its standing, this concept has been a tool for curbing exposure to illicit or controversial activities. Its removal promises to reduce compliance burdens for institutions, but also risks creating blind spots in identifying problematic business relationships.
The timing is fraught. Reports of suspicious transactions in the United States have more than doubled since 2017, reaching around two million last year. Meanwhile, financial fraud losses have surged to nearly US$13 billion, a 25 per cent increase in just twelve months. Global anti-fraud spending is set to rise sharply, from US$28 billion in 2024 to more than US$50 billion by 2026, underscoring the scale of the threat. In this environment, removing a safeguard, even one as subjective as reputation risk, could inadvertently embolden riskier practices.
Supporters argue that the change frees banks from political or ideological pressures, allowing them to serve clients without fear of reputational backlash. Yet without the obligation to document or justify account closures or service refusals, transparency is weakened. Critics warn this could lead to inconsistent, opaque decision-making, eroding both public trust and the ability to detect patterns of abuse. For customers, the outcome could be greater exposure to institutions that lack the incentive, or the tools, to pre-emptively disengage from dubious actors.
For the BFSI sector, the broader concern lies in precedent. Shifts away from reputational assessment may be replicated in other areas of compliance, gradually altering the balance between operational freedom and regulatory oversight. Financial institutions now face a strategic choice: rely solely on internal governance frameworks or voluntarily maintain higher-than-required standards to reassure stakeholders. In a climate of rising fraud risk and mounting geopolitical uncertainty, the institutions that prioritise rigorous self-policing may find themselves better positioned to weather both market shocks and reputational challenges.
