Fed Proposes Rule to Permanently Eliminate 'Reputational Risk' from Bank Supervision, Initiates 60-Day Comment Period

The Federal Reserve Board has formally proposed a rule to codify the removal of “reputational risk” as a supervisory factor for banks, initiating a 60-day public comment period on the measure. The proposal, announced on February 23, 2026, aims to permanently bar examiners from penalizing financial institutions for providing services to lawful but disfavored businesses, including cryptocurrency firms.

This rulemaking seeks to replace what regulators have described as a subjective standard with a focus on quantifiable financial risks, addressing long-standing industry and political concerns over allegations of “debanking” tied to Operation Choke Point 2.0.

The proposed rule would explicitly prohibit the Federal Reserve from encouraging or compelling the institutions it supervises to deny services based on constitutionally protected activities or involvement in lawful businesses perceived to carry reputational risk. Comments on the proposal must be submitted within 60 days of its publication in the Federal Register, after which the central bank will consider feedback before issuing a final rule.

Regulatory Shift Targets Subjective Standards in Bank Examinations

The Fed’s proposal represents the most binding step in a broader regulatory rollback initiated last year. In 2025, the central bank announced it would no longer factor “reputational risk” into supervisory examinations, instead directing examiners to prioritize “material financial risks” such as credit, liquidity, and market risk.

Federal Reserve Vice Chair for Supervision Michelle Bowman stated that the vague and subjective nature of reputational risk standards has introduced unnecessary variability into supervision. “We have heard troubling cases of debanking—where supervisors use concerns about reputation risk to pressure financial institutions to debank customers because of their political views, religious beliefs, or involvement in disfavored but lawful businesses,” Bowman said in a statement accompanying the proposal. She emphasized that discrimination on these bases is unlawful and has no role in the Federal Reserve’s supervisory framework.

The move aligns with recent actions by other federal banking agencies. The Office of the Comptroller of the Currency (OCC) previously removed reputational risk from its supervisory guidance and has engaged in formal rulemaking with the Federal Deposit Insurance Corporation (FDIC) to eliminate its use across the banking system.

Lawmakers and Industry Leaders Support Codification

The proposal has drawn immediate praise from lawmakers who have long criticized the use of reputational risk as a tool for informal regulatory pressure. Senator Cynthia Lummis (R-WY), who previously highlighted Federal Reserve documents showing how reputational risk was applied to crypto firms, welcomed the rulemaking. “It’s not the Fed’s role to play both judge and jury for banking digital asset companies,” Lummis posted on social media. “Glad to see this important step to permanently remove ‘reputation risk’ from Fed policy and put Operation Chokepoint 2.0 to rest so America can become the digital asset capital of the world.”

Industry analysts view the proposal as part of a broader effort to establish clear, predictable rules for banking access. Alex Thorn, head of firmwide research at Galaxy Digital, characterized the development as a continuation of the “Chokepoint 2.0 rollback.” Operation Chokepoint 2.0 is a term used by the crypto industry to describe alleged coordinated efforts during the prior administration to pressure banks into severing ties with digital asset firms.

Policy Experts Urge Legislative Action for Lasting Clarity

While welcoming the regulatory proposal, policy experts caution that administrative rulemaking alone may not provide permanent certainty. Sudhakar Lakshmanaraja, founder of Web3 policy body Digital South Trust, noted that informal supervisory pressure was never the sole barrier to crypto banking access. “Banks are cautious about crypto not only due to AML compliance and volatility, but because crypto payment rails and stablecoins can challenge core banking economics like deposits and payments,” he said.

Lakshmanaraja urged Congress to resolve remaining uncertainties through legislation. He specifically cited the need for clear crypto market structure and stablecoin laws, such as the CLARITY Act and the GENIUS Act, to ensure lawful businesses receive predictable banking access rules rather than being subject to “discretionary supervisory signals.” The GENIUS Act, which would establish federal guidelines for payment stablecoin issuance, has recently been the subject of related rulemaking at the FDIC, which extended the comment period for its implementing regulations through May 2026.

Legal and Political Context Informs Rulemaking Push

The Fed’s proposal arrives amid ongoing litigation and political scrutiny of bank account closures. President Donald Trump is currently pursuing a $5 billion lawsuit against JPMorgan Chase, alleging the bank unlawfully closed his accounts following the January 6, 2021, Capitol attack for political reasons. According to recent court filings, a former JPMorgan executive acknowledged that the bank closed Trump’s accounts after the events of that day.

Last August, Trump signed an executive order directing federal banking regulators to adopt policies preventing “politicized or unlawful debanking,” with the White House stating the administration had “ended Operation Chokepoint 2.0 once and for all.” Earlier this month, the FDIC settled a FOIA lawsuit brought at Coinbase’s direction, agreeing to pay $188,440 in legal fees after a court found the agency had violated FOIA by withholding dozens of crypto-related “pause letters”—documents showing banks were pressed to limit crypto activity during the Biden era.

Frequently Asked Questions

What is Operation Chokepoint 2.0?

Operation Chokepoint 2.0 is a term used by cryptocurrency industry participants and some lawmakers to describe alleged informal pressure from federal banking regulators during the Biden administration encouraging banks to sever relationships with digital asset firms. Critics argue that regulators used “reputational risk” guidance as a justification for what they characterize as debanking of lawful crypto businesses.

Does this Fed proposal completely end debanking of crypto firms?

The proposal removes “reputational risk” as a supervisory factor, meaning examiners cannot penalize banks solely for serving crypto firms based on reputational concerns. However, banks must still conduct risk-based assessments under existing anti-money laundering (AML) requirements and evaluate material financial risks such as credit, liquidity, and market risk. Banks also remain subject to sanctions compliance obligations and must file Suspicious Activity Reports (SARs) as required by law.