Has the Era of Politicized Debanking Finally Died? OCC and FDIC Mandate Objective Supervision

Federal banking regulators have initiated a regulatory overhaul to prevent the arbitrary denial of services to lawful businesses. On October 7, 2025, the OCC and FDIC proposed new rules to eliminate subjective reputation risk assessments, focusing bank supervision on quantifiable financial metrics.

This is a win for market participants, especially alternative business lenders in sectors often targeted by "debanking"—closing or refusing accounts due to perceived risks. This action supports the executive branch's policy, initiated by Executive Order 14331, to eliminate policies allegedly promoting discrimination against cryptocurrency and other industries.

What Specific Provisions Will Stop Politically Motivated Account Closures?

The proposal directly prohibiting the use of reputation risk is the most potent weapon against the politicization of finance. It mandates that regulatory energy be expended only on genuine threats to institutional viability, not on compliance theater designed to appease public opinion.

Proposition: Formal Prohibition on Adverse Supervisory Action Based on Subjectivity

The proposed rule explicitly prohibits regulators from criticizing, either formally or informally, or taking adverse action against a financial institution solely on the basis of reputation risk.

• Adverse Action Defined Broadly: "Adverse action" encompasses any negative feedback delivered by or on behalf of the agency, including statements in a report of examination, an enforcement action, or a memorandum of understanding. This prevents examiners from issuing informal yet binding criticisms that previously compelled management to redirect resources toward immaterial concerns.

• Ratings and Licensing Protected: The definition of "adverse action" specifically includes the denial of a licensing application, a downgrade (or contribution to a downgrade) of any supervisory rating (such as CAMELS), or the imposition of a capital requirement above minimum ratios. This links adverse consequences directly to demonstrable financial deficiency, not public perception.

• Barriers Against Evasion: The rule prohibits supervisors from using Bank Secrecy Act (BSA) or anti-money laundering (AML) concerns as a pretext for reputation risk, thereby attempting to neutralize the historical weaponization of compliance rules against disfavored industries, while still permitting enforcement for actual violations of law.

Proposition: Banning Account Intervention Based on Viewpoint or Lawful Activity

The rule directly addresses the core issue of debanking by prohibiting examiners from coercing institutions into terminating or modifying customer relationships based on non-financial factors.

• Protection for Disfavored Industries: Examiners are barred from requiring, instructing, or encouraging a bank to close an account, refrain from providing a service, or modify terms based on a person’s or entity’s political, social, cultural, or religious views or beliefs, constitutionally protected speech, or solely on the basis of politically disfavored but lawful business activities perceived to present reputation risk.

• Scope Includes Third-Party Contracts: This prohibition extends beyond direct customer accounts to cover requiring, instructing, or encouraging an institution to refrain from contracting with, or to terminate or modify a contract or business relationship with, a third party, including an institution-affiliated party, on the basis of reputation risk. This protection covers relationships with bank clients and third-party service providers, and prospective business relationships.

• Codified Definition Eliminating Subjectivity: "Reputation risk" is formally defined as any risk that an activity could negatively impact public perception for reasons unrelated to the current or future financial condition of the institution. The FDIC’s staff noted that without clear standards, supervision for reputation risk was "inconsistent and has at times reflected individual perspectives rather than data-driven conclusions".

How Will the Agencies Ensure Supervision Focuses on Quantifiable Material Risk?

The second NPRM aims to restore discipline by establishing a long-overdue formal definition for supervisory action, ensuring regulatory focus is solely on material financial risks that threaten the stability of the institution or the Deposit Insurance Fund (DIF).

Proposition: Establishing a High Threshold for "Unsafe or Unsound Practice"

The rule proposes defining "unsafe or unsound practice"—a statutory term previously interpreted inconsistently by courts—by tethering it firmly to practices that cause or are likely to cause material financial harm.

• Defining Material Harm: An "unsafe or unsound practice" must be both (1) contrary to generally accepted standards of prudent operation; AND (2) either materially harmed the financial condition, OR, if continued, is likely to materially harm the financial condition of the institution or present a material risk of loss to the DIF. This focuses examiner attention on direct, clear, and predictable impacts on capital, asset quality, earnings, liquidity, or sensitivity to market risk.

• Proximity to Loss Required: The "likely" standard ensures that enforcement action is reserved for conduct that is sufficiently proximate to a material financial loss, preventing the extrapolation of deficient conduct that is not likely to cause material harm. The agencies generally interpret "harm" to refer to financial losses, meaning non-material financial losses are insufficient to meet the proposed standard.

• Lessons Learned from Failure: This definition is critical given that FDIC Acting Chairman Travis Hill highlighted that most outstanding supervisory criticisms identified before the 2023 Silicon Valley Bank failure were unrelated to core financial risks. The proposal aims to focus resources on practices that are more likely to lead to material financial losses, bank failures, and instability.

Proposition: Constraining the Use of Matters Requiring Attention (MRAs)

The rule establishes uniform standards for when examiners may communicate deficiencies that require attention (MRAs, replacing FDIC’s MRBAs), elevating the threshold for their issuance significantly from previous practice.

• Elevating the Issuance Bar: An MRA may only be issued if the practice: (1) is an actual violation of a banking or banking-related law or regulation, OR (2) if continued, could reasonably be expected to materially harm the financial condition or present a material risk of loss to the DIF. This is intended to stop examiners from issuing criticisms for "immaterial procedural, documentation, or other deficiencies".

• Distinguishing Non-Binding Suggestions: For concerns that do not meet the high MRA standard, examiners may only offer informal, non-binding "supervisory observations" or suggestions, which institutions are not required to track or submit action plans for. Examiners are prohibited from escalating a non-adopted suggestion into an MRA solely based on the institution's failure to adopt it in multiple examination cycles.

• Tying Rating Downgrades to Material Risk: The agencies expect that a downgrade in an institution’s composite supervisory rating to "less-than-satisfactory" (such as a CAMELS rating of '3' or below) should only occur in circumstances where the institution receives an MRA or enforcement action that meets the new, higher material risk standard.

What Do These Shifts Mean for Alternative Business Lenders and Financial Innovation?

This regulatory overhaul signals a clear pivot to a more rational, predictable supervisory environment, reducing compliance overhead and opening previously stifled sectors to financial partnership.

Proposition: Reduced Compliance Burden and Increased Efficiency

The industry views the elimination of subjective risk criteria as an immediate boon for efficiency, allowing resources to be redirected from defensive compliance to core business objectives.

• Focusing Examination Resources: The removal of reputation risk is designed to free up institutional and agency resources that were previously diverted to addressing subjective and non-quantifiable concerns, allowing focus on core financial risks—credit risk, liquidity risk, and interest rate risk.

• Increased Objectivity and Predictability: FDIC staff acknowledged that the independent consideration of reputation risk by examiners did not result in consistent or predictable assessments of material financial risk. Quantitative analysis by the OCC showed that supervisory texts citing "reputation" had a higher subjectivity score (0.43) than those without (0.33), suggesting the new rule will materially increase objective supervision.

• Tailored Oversight for Smaller Entities: The commitment to tailoring supervision based on size, riskiness, and complexity—especially in MRA issuance—means community banks and their alternative lending partners will face a significantly higher bar for findings than larger institutions. This facilitates a tailored regulatory framework that allows community banks to meet local needs without disproportionate regulatory drag.

Proposition: Opportunities for Growth in Previously Stigmatized Sectors

By explicitly prohibiting supervisory intervention based on politically disfavored but lawful business activities, the rules open the door for banks to pursue profitable relationships in alternative finance and digital assets without fear of arbitrary punishment.

• Facilitating Fintech Partnerships: The previous subjective regime created "chilling effects," preventing banks from entering into or continuing profitable business relationships with law-abiding customers they would have otherwise maintained. The proposed elimination of reputation risk reduces the "chilling effects" on institutions engaging with high-growth sectors like cryptocurrency.

• Statutory Alignment with Safety and Soundness: Risks deemed irrelevant to core financial condition (i.e., reputation risk) no longer serve as an impediment to sound business decisions. This means that the profitable engagement of alternative lenders and fintechs with traditional institutions, provided core financial and compliance risks are managed, is now fully aligned with regulatory expectations.

• A Welcome Regulatory Reset: The American Bankers Association (ABA) noted that bank supervision had "shifted away from focusing on the most important factors affecting safety and soundness," a negative trend that is finally changing thanks to this new direction from regulatory leadership.

Does the New Regulatory Framework Actually Clear the Field for Crypto, Cannabis, and Firearms Clients?

For the institutional lending executive and the alternative finance provider, the joint Notices of Proposed Rulemaking (NPRMs) from the OCC and FDIC represent more than mere supervisory fine-tuning; they constitute a structural removal of regulatory coercion that previously stifled profitable opportunities. The proposed codification of the elimination of "reputation risk" directly targets the mechanism banks used to justify "debanking" high-risk sectors.

Why Will Banking Partners Now Be More Willing to Engage with Crypto, Cannabis, and Firearms?

The core shift is that bank supervision is now explicitly barred from using subjective social or political pressures to steer business decisions, reducing the non-quantifiable threat that drove many de-risking campaigns.

1. Direct Prohibition on Politicized Intervention: The rules explicitly prohibit the agencies from requiring, instructing, or encouraging an institution to terminate a contract with, discontinue doing business with, or modify terms based on the person’s or entity’s political, social, cultural, or religious views or beliefs, constitutionally protected speech, or solely on the basis of politically disfavored but lawful business activities perceived to present reputation risk.

   • This is the critical institutional firewall. For sectors like digital assets (crypto) or firearms dealers, which historically faced mass closures due to alleged abuses of the supervisory process (often compared to "Operation Chokepoint"), this new mandate removes the explicit regulatory threat previously leveraged by examiners.

   • The term "doing business with" is construed broadly to include relationships with bank clients, third-party service providers, and prospective business relations. This ensures the prohibition protects the entire value chain associated with alternative finance.

   • The agencies explicitly acknowledged that relying on reputation risk introduces subjectivity and the potential for political or other biases into the supervisory process, leading to regulatory interference in day-to-day business decisions that should be left to the institutions.

2. Reputation Risk Is Stripped of Safety and Soundness Value: The agencies define "reputation risk" as having no relationship to the current or future financial or operational condition of the institution. Regulators believe that any activity that would impact safety and soundness does so through traditional, measurable risk channels, such as credit risk, liquidity risk, or market risk, which supervisors already focus on.

   • Reputation risk as a standalone concept is deemed to add no material value from a safety and soundness perspective and is considered "ripe for abuse".

   • The removal of this subjective risk category increases objectivity and predictability in supervisory decisions, benefiting regulated entities seeking to manage regulatory expectations accurately.

   • Institutions previously incurred costs and burdens by terminating profitable business relationships with law-abiding customers solely due to the absence of OCC expectations regarding reputation risk. This rule eliminates those unnecessary constraints, potentially increasing profitability for banks willing to engage in effective risk management.

3. Limitations on Pretextual Enforcement: Examiners are explicitly prohibited from using Bank Secrecy Act (BSA) and anti-money laundering (AML) concerns as a pretext for reputation risk.

   • This measure directly addresses the fear that supervisors might simply relabel "reputation risk" as "AML deficiencies" to continue the debanking policy.

   • The agencies maintain the authority to enforce BSA/AML laws and OFAC sanctions; however, this enforcement cannot be used as a pretense for pursuing reputation risk goals.

   • While banks retain the ability to make business decisions consistent with safety and soundness and compliance with applicable laws, the regulatory pressure to avoid sectors due to their perceived political risk is removed.

Should Alternative Lenders Expand into These Verticals Now, or Wait Until the Rules Are Final?

The main focus now is on getting ready, but big investments should usually wait until everything is finalized.

Regulatory Momentum Dictates Urgency: The shift away from reputation risk is already an operational mandate. The FDIC is removing references to reputation risk from its examination manuals, guidance, and policy documents concurrently with the NPRM. The OCC already discontinued reputation risk-based supervision in March 2025 via Bulletin 2025-4, making the proposed rule a formal legal mandate to codify an existing practice.

• This internal agency action suggests high confidence in the final rule's adoption, as the regulatory apparatus is already adjusting its function.

• The move contributes to a broader deregulatory push intended to reduce burden and improve efficiency for banks.

• The OCC estimates that the elimination of reputation risk will result in aggregate cost savings for supervised institutions ranging from "hundreds of millions to several billion dollars" annually. This savings is driven by reduced compliance and remediation efforts related to unnecessary supervisory actions.

Actionable Strategy: Initiate Preparatory Diligence: For alternative lenders looking at high-growth sectors like crypto, waiting until the 60-day comment period concludes and the rule is finalized (which could take several more months) means missing the initial opportunity window.

• Engage Banking Partners: Proactively open dialogue with banking partners regarding their internal policy readiness. Banks should be reviewing their onboarding procedures now to rely solely on documented, objective, and neutral criteria.

• Build Tailored Compliance Frameworks: Prepare robust compliance and risk management frameworks that emphasize traditional financial risks (credit, liquidity, operational risk) and comply explicitly with BSA/AML requirements, ensuring there is no vulnerability that could be used, even pretextually, by examiners.

• Focus on Lawful Activities: While the proposed rule opens the door for banking relationships in cannabis and firearms, it is crucial to remember that cannabis remains federally illegal. The rule only protects lawful business activities perceived to present reputation risk. The risk profile associated with federal illegality (or complex state-level legality) still presents core compliance challenges distinct from mere reputation risk, and banks retain the authority to reject customers based on their risk tolerance or compliance mandates.

Does the Executive Order Context Make These Rules Temporary or Permanent?

The fact that the proposals originated from Executive Order 14331, Guaranteeing Fair Banking for All Americans, in August 2025 is critical for understanding their immediate necessity, but their structure ensures long-term resilience.

Codification Provides Durability: These are not temporary guidance documents issued under agency discretion; they are Notices of Proposed Rulemaking (NPRMs) intended to codify the elimination of reputation risk into federal regulations.

• Rulemaking vs. Guidance: Regulations carry the force of law and require a formal, public process (Notice and Comment rulemaking) to be enacted, amended, or repealed. An administration change cannot instantly nullify a final rule, unlike reversing informal guidance or policy memos.

• Procedural Delay: A future administration wishing to reintroduce reputation risk would have to initiate an entirely new rulemaking process, including publishing a proposed rule, soliciting comments, and justifying the reversal—a multi-year effort that subjects the reversal to public and judicial scrutiny.

Supervisory Alignment on Material Risk: Beyond political backing, the agencies justify the move by citing supervisory experience demonstrating that using reputation risk does not increase institutional safety and soundness. Instead, they emphasize the need to focus resources on practices that are likely to materially harm an institution's financial condition (Capital, Asset Quality, Earnings, Liquidity, Sensitivity to Market Risk).

• Focus on SVB Failure: FDIC Acting Chairman Travis Hill pointed to the 2023 failure of Silicon Valley Bank (SVB) as evidence that most outstanding supervisory criticisms were unrelated to core financial risks. The rule formalizes the shift toward prioritizing these material financial risks.

• Industry Consensus: Key industry groups, including the Bank Policy Institute (BPI) and the Independent Community Bankers of America (ICBA), explicitly support the measure to strengthen the supervision framework and focus on material financial risks. This bipartisan and industry-supported emphasis on objective risk suggests the underlying philosophy of the change will likely endure, regardless of shifting political winds.

ConclusionWhile the rules may face future challenges, the regulatory pivot toward measurable financial harm as the sole basis for enforcement actions and Matters Requiring Attention (MRAs) represents a fundamental, operational change in bank supervision. Institutional executives should treat these rules as permanent changes to the compliance baseline for the foreseeable future and integrate them into long-term strategic growth plans.

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