The Federal Reserve’s recent move to remove “reputation risk” as a formal element of bank supervision caught a lot of people by surprise. For years, reputation was an implicit factor in how institutions were examined. Now regulators appear to be stepping back from risks they consider harder to define or quantify.
Recent research reinforces why leaders shouldn’t confuse regulatory definitions with market reality. The Burson Global Reputation Economy Study found that companies with strong reputations generated an average 4.78% in additional unexpected annual shareholder returns not explained by traditional financial metrics. Applied globally, the study estimates reputation represents roughly $7 trillion in economic value. In other words, reputation may be hard to supervise, but it is far from intangible.
Regulators may call reputation risk subjective. Markets clearly don’t.
On paper, the Fed’s shift reflects a broader effort to narrow supervisory focus and avoid subjective judgments. Reputation risk has always been a gray area. Critics argue that terms like “reputational concern” can be inconsistently applied or influenced by politics rather than clear standards.
But here’s the leadership lesson that shouldn’t get lost: just because regulators are moving away from softer, harder-to-measure risks doesn’t mean those risks stopped mattering.
If anything, the opposite may be true.
Reputation is operating discipline.
The Federal Reserve’s proposal reflects a broader push to remove ambiguous or subjective standards from bank exams.
That may reduce regulatory uncertainty. It may even lower compliance friction for institutions navigating controversial industries or emerging technologies.
What it does not do is eliminate the real-world consequences of losing trust.
The Burson study also found that declining trust in the financial sector alone puts roughly $4.3 billion in reputational value at risk. That number doesn’t appear on a balance sheet, but it shows up quickly in customer behavior, investor confidence, and regulatory scrutiny when credibility starts to erode.
Customers still leave. Investors still hesitate. Employees still question leadership. Media scrutiny still shapes public perception. None of that disappears just because a regulator decides not to score it explicitly.
Reputation may be harder to quantify than capital ratios, but it remains one of the most powerful drivers of long-term performance.
The danger of misreading the moment
Whenever regulators relax a framework, some leaders hear permission to deprioritize whatever used to be measured. That’s a mistake.
Reputation risk was never just about pleasing examiners. It was shorthand for something deeper: how an organization’s behavior is interpreted by the public, stakeholders, and employees over time.
Even regulators acknowledge that reputational issues still show up indirectly. If a damaged reputation leads to customer attrition, lawsuits, or operational disruptions, those risks still affect supervision through more traditional categories.
In other words, reputation didn’t disappear. It just moved upstream.
The real risk now is that some organizations will treat this policy shift as validation of a narrow, compliance-only mindset: if it’s not on the exam checklist, it’s not a priority.
That thinking tends to age badly.
Reputation isn’t PR. It’s operating discipline.
One of the biggest misconceptions about reputation is that it belongs to communications teams. In reality, reputation is the cumulative effect of decisions, culture, and leadership behavior.
You can remove the phrase “reputation risk” from a regulatory manual. You cannot remove the way people interpret your actions.
A bank that alienates customers through inconsistent policies doesn’t suddenly become trusted because regulators stop tracking the label. An organization that handles crises defensively doesn’t rebuild credibility because a risk category disappears from an exam template.
Trust is not a regulatory requirement. It’s a market reality.
What leaders should take away
The Fed’s new posture may simplify supervision, but it raises the bar for internal leadership judgment. While studies like Burson’s attempt to put a dollar value on reputation, most leaders already know the truth from experience: once trust starts to slip, the costs compound faster than any regulatory framework can capture. Without an external framework forcing the conversation, organizations need to be even more disciplined about how they think about reputation.
That doesn’t mean chasing headlines or avoiding difficult decisions. It means understanding that reputation is an output of behavior, not a branding exercise.
Strong institutions will continue to ask the harder questions:
- How will this decision look from the outside?
- Are we being consistent with our stated values?
- Are we building credibility over time, or spending it?
Because the market still evaluates reputation, even when regulators step back.
And history shows that trust problems rarely show up first as regulatory findings. They show up as customer backlash, employee frustration, or a slow erosion of confidence that leadership didn’t see coming.
The Fed may be stepping back from reputation risk as a supervisory category.
Leaders shouldn’t step back from it as a leadership responsibility.
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