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What is reputational risk: How it fits into business strategy
August 26, 2025
0 min read
What is reputational risk: How it fits into business strategy
As banks and credit unions navigate evolving regulatory expectations, reputational risk remains important, especially for community financial institutions that prioritize strong, trusted relationships. While regulatory agencies have clarified they will not examine reputational risk in isolation, many institutions continue to consider it part of a broader, community-centric strategy. Understanding reputational risk and its impact can help financial institutions stay aligned with their mission, protect stakeholder trust, and make informed business decisions.
Regulatory guidance on reputational risk
In a recent shift in examination expectations, the three federal banking regulators—the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation—have confirmed that they will no longer consider reputational risk as a stand-alone factor during bank examinations. The National Credit Union Administration is being called upon by America’s Credit Unions to follow suit. The change is part of a broader effort to clarify expectations and reduce the likelihood of institutions feeling pressure to exit entire industries based solely on perceived reputational concerns.
This shift provides more certainty around how regulators approach client risk for banks and credit unions. However, it raises important questions about how financial institutions define and manage reputation within their risk frameworks, primarily when serving diverse or high-profile client groups. While regulators have stepped back, reputational considerations remain, especially regarding community trust and long-term strategy.
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Connect with an expertWhat is reputational risk and why it matters
Reputational risk is the potential for negative public perception to affect a financial institution's credibility, client trust, or financial performance. It often stems from how an institution is viewed by its community, clients, regulators, or media, and it may arise even when no compliance violations or operational failures have occurred.
Today, reputational risk can be influenced by various factors, including the types of clients an institution chooses to serve or decline, partnerships with third-party vendors, lending or investment decisions, or how it handles emerging social or political issues. Even lawful and risk-based decisions may draw public scrutiny if they appear inconsistent with the institution's stated values or community expectations.
These factors make reputational risk more dynamic than ever. For example, exiting a relationship with a high-profile business might be entirely appropriate from a risk management perspective. Still, without clear communication or documentation, the public can misinterpret the decision as unfair or discriminatory. Likewise, continuing to serve a controversial client segment may prompt questions from community members, advocacy groups, or employees.
New regulatory changes
The decision to remove reputational risk as a factor in formal bank examinations was mainly in response to concerns about derisking—when financial institutions end relationships with entire categories of clients or industries based on perceived reputational harm rather than individual risk assessments. In previous years, some banks chose to exit entire sectors, such as money services businesses, cannabis-related businesses, or international remittance providers, not because of direct regulatory violations, but because of uncertainty around supervisory expectations. This derisking trend created unintended consequences. Legitimate businesses, especially those serving underserved or international communities, were sometimes left without access to essential financial services. In response, regulatory agencies clarified that while banks can make risk-based decisions, supervisors would no longer use reputational risk alone as a basis for exam criticism. The goal is to promote financial inclusion while ensuring client decisions are grounded in individual risk, not generalized assumptions.
Reputational risk is connected to other areas of risk
Reputational risk rarely stands alone. In fact, it often overlaps with other key risk categories, which means it can surface in situations where it may not be immediately obvious. Understanding these connections helps financial institutions see the full picture before making decisions that could have lasting effects.
- Strategic risk can rise when an institution chooses to enter or exit industries that are considered sensitive or controversial. Expanding into a new market segment may create growth opportunities, but it can also bring heightened public attention. Likewise, stepping away from a line of business for sound risk reasons may be interpreted by some as a value statement.
- Compliance risk can occur when actions do not align with written policies or when those policies are applied inconsistently. Even if a decision is legal and defensible, failing to follow established processes can create reputational questions about fairness, transparency, or governance.
- Credit risk can be complicated when the financial strength of a borrower becomes secondary to how the relationship is perceived. A strong-performing borrower in a controversial industry may pose minimal credit risk, but the reputational implications could still influence the institution’s decision-making.
For example, an institution might decide to end a relationship with a client whose lawful business activity does not align with the bank’s mission or community priorities. While the decision could be supported by credit analysis, operational considerations, or policy requirements, it may also reflect reputational concerns.
The key is to evaluate the full risk picture and anticipate how a decision will be perceived by customers, staff, and community stakeholders. By doing so, banks and credit unions can minimize surprises, ensure decisions are consistent with their stated values, and preserve the trust that often takes years to build.
Reputation as part of governance conversations
Even though examiners will no longer evaluate reputation as a stand-alone risk, institutions benefit from including it in board and leadership discussions. In fact, the regulatory agencies expect banks and credit unions to engage in sound risk management practices, operate in a safe and sound manner. For many community financial institutions, reputation remains an important aspect of risk management. Common governance examples of include:
- Reviewing client onboarding and exit policies for reputational considerations: Customer acceptance and closure policies should account for reputational implications and be applied consistently. Clear criteria and documentation help staff explain decisions to customers, community members, or regulators.
- Evaluating new products or services through a community impact lens: Before launching new offerings, consider how they will be received by the community and whether they align with the institution’s mission. This helps prevent missteps that could harm trust or brand perception.
- Discussing high-profile vendor relationships that may attract stakeholder attention: Vendors with public visibility can influence how the institution is perceived. Leadership discussions should weigh the benefits against potential reputational costs and ensure there is a plan to address questions if they arise.
When reputation is discussed at the board or committee level, it helps ensure that the institution's decisions align with its stated values and risk appetite.
A simple framework for assessing reputational exposure
Adding structure to reputational risk management does not require new systems. Institutions can adapt existing tools to include questions such as:
- Does the client or activity align with our institution's mission and values?
- Could this relationship or decision attract public or media attention?
- Have we documented how and why we reached a decision?
- Would this decision be viewed as fair and consistent by clients and regulators?
These questions help bring consistency to decisions that often involve subjective judgment. They also help front-line and risk staff feel confident in their approach when handling complex or sensitive situations.
Prioritizing reputation
For many banks and credit unions, reputational risk is not just about regulatory expectations but about living out the values they promote within their communities. These institutions are not managing their reputation to meet a rule. They are doing it because they believe it is the right thing to do.
Local financial institutions often have deep relationships with their clients. Their reputations are built over years, sometimes decades. Once trust is lost, it is not easily regained. Institutions that include reputational considerations in their risk and business decisions are often better positioned to preserve that trust during times of change.
Reputational risk may no longer be central to regulatory examinations, but remains a valuable part of business strategy. Financial institutions that proactively consider reputation in their governance, client policies, and community engagement are taking steps to ensure long-term strength and stakeholder trust.
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About the Author
Terri Luttrell, CAMS-Audit, CFCS
Compliance and Engagement Director
Abrigo
Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size.
