Why We Shouldn’t Regulate Reputation Risk at Banks

What do payday lenders, firearms retailers, porn stars, churches, coal mines, and condom companies have in common? All have complained that regulators pressured financial institutions to close their accounts over reputation-risk concerns.  In a my article (available here), forthcoming in the Georgia Law Review, I explain that broad regulation of reputation risk does not reduce bank risk and unnecessarily politicizes bank regulators.

Financial regulators say reputation risk is the risk of negative public opinion or negative publicity. Wells Fargo, for example, hurt its reputation by opening millions of unauthorized customer accounts. Reputation is important to all businesses, but it … Read more

The Duty of Care for Bank Directors and Officers

The 2008 financial crisis was catastrophic for the U.S. banking industry. Between 2007 and 2014, 510 banks failed. Another 700-plus banks received some type of federal monetary assistance. Unsurprisingly, this led to calls to hold bank directors and officers legally accountable for harm they may have caused.

One federal regulator with the power to hold directors and officers of failed banks financially responsible is the Federal Deposit Insurance Corporation (FDIC). The FDIC acts as a receiver for failed banks. It has authority to sue directors and officers for losses they caused to failed banks and has been aggressive in doing … Read more