Woodstock Institute has written to federal financial regulators disagreeing with their proposal to “… codify the elimination of reputation risk from their supervisory programs.”
“Sociopolitical issues and emerging social forces are a critical part of the financial industry and do, in fact, have a direct impact on shareholder value and safety and soundness. For example, concerns in the banking industry about conflicts of interest, the effect of climate change on collateral and the insurance that protects it, predatory financial products, digital assets used to obscure the transparent flow of capital, artificial intelligence, and the inequitable flow of capital are already leading to changes in core banking practices and the overall financial industry that define how business is done and the cost associated with mitigating the risks to shareholder value. In these examples alone, billions of dollars are directly tied to sociopolitical issues that must be addressed at the highest level of corporate decision making, and very few, if any, fall neatly within the traditional models of Enterprise Wide Risk Management (EWRM). Institutions that ignore these risks simply because they aren’t immediate financial risks do so at their own peril. As such, these risks must ultimately be fed into the new and evolving fundamental drivers of corporate performance, strategy, and regulatory oversight.” – Horacio Mendez, President & CEO of Woodstock Institute
In order to ensure the safety and soundness of both the financial industry and the wider economy, we urge the federal government to abandon its proposal to prohibit the use of reputational risk by regulatory agencies. Regulators should instead proactively work with the financial industry to identify and build methods to mitigate sociopolitical risks. While the results of this work may fall short, it is far better than ignoring this issue and waiting for an inevitable financial crisis.
