Senate panel advances debanking bill to block regulators from using reputational risk in supervision

The Senate Banking Committee voted to advance a bill that would eliminate references to reputational risk as a way for federal regulators to supervise financial institutions.

The committee voted 13- 11 to advance that bill to the Senate on Thursday during a markup where the committee also voted to move forward with a bill to regulate stablecoins. Work would still need to be done on the House side.

The bill, called the Financial Integrity and Regulation Management Act, aims to address concerns around debanking and would block regulators from using reputational risk to supervise risk — following the crypto industry's condemnation of government agencies they say are cutting them off from the financial sector. Notably, Democrats did not vote to support the bill.

Senate Banking Committee Chair Tim Scott, R–S.C., introduced the bill last week and said his legislation would "curtail the weaponization of federal banking agencies by eliminating the ability for regulators to use reputational risk as a component of supervision."

The bill addresses other reputational risks, including "disfavored political groups." The Federal Reserve defines reputational risk as the "potential that negative publicity regarding an institution's business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions."

The committee heard several amendments to the bill on Thursday, which included changes such as striking the bill and instead replacing it with a section of the Safer Banking Act — a bill that ensures cannabis businesses have access to banks. Some changes did go through via a "manager's package" that includes an amendment to require federal regulators to "right size regulations for banks based on their risk profiles and business models."

Crypto debanking has become a hot topic among some lawmakers and the digital asset industry over the past few months amid increased criticism from crypto firms that say they face challenges when looking to establish and maintain bank accounts in the U.S.

Some in the crypto industry have also used the term "Operation Choke Point 2.0" to refer to the issue. The phrase was coined by Castle Island Ventures co-founder Nic Carter in 2023, comparing it to Operation Choke Point 1.0, a 2013 U.S. Department of Justice Initiative that sought to limit banking services for industries considered high-risk for fraud and money laundering, including payday lenders and firearm dealers.

Meanwhile, bank executives such as JPMorgan Chase CEO Jamie Dimon have said banks are at risk of paying millions of dollars in fines if something goes wrong.

Fed Chair Jerome Powell has said it was time to "take a fresh look" at debanking during a congressional hearing last month.