WASHINGTON (5/28/14)--Rep. Jeb Hensarling (R-Texas), chair of the House Financial Services Committee, requested that the National Credit Union Administration, along with other regulators, provide "reputation risk" comments by June 12.
Hensarling asked that National Credit Union Administration Chair Debbie Matz, Federal Reserve Chair Janet Yellen, Federal Deposit Insurance Corp. Chair Martin Gruenberg and Comptroller of the Currency Thomas Curry respond with the following information:
Whether or not the agency considers "reputation risk" in its supervisory duties, and if so, an explanation of why it is an appropriate element of the agency's supervisory program.
If the agency does consider "reputation risk," what data is used to determine its effects on an institution's safety and soundness. Also, an explanation of why this data is not already accounted for under traditional capital adequacy, assets, management capability, earnings, liquidity and sensitivity to market (CAMELS) ratings.
If the agency does use "reputation risk," whether or not a poor rating under this analysis is sufficient to recommend a change in an institution's business practices despite a strong rating under traditional CAMELS analysis.
Hensarling is concerned that the idea of "reputation risk" relies on subjective judgment, as opposed to the Uniform Financial Institutions Rating System, which uses as factors in the CAMELS rating.
He cites use of the "reputation risk" metric in recent guidance issued by NCUA, the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and the Federal Reserve.
"Under the CAMELS supervisory framework, 'reputation risk' is not a standalone indicator that, on its own, can warrant a recommendation by your agency that a depository institution cease providing a particular product of service," the letter reads.
Hensarling said he is concerned that the use of a "reputation risk" indicator is too "vague, subjective and unquantifiable" to lead to a regulatory outcome, such as a depository institution that could be compelled to sever a customer relationship that is otherwise in accordance with laws and regulations, but has been the subject of unflattering press coverage or disapproval of its business model from a branch of government.
"The introduction of subjective criteria like 'reputation risk' into prudential bank supervision can all too easily become a pretext for advancement of political objectives, which can potentially subvert both safety and soundness and the rule of law," he wrote.