By Sarah N. Lynch
WASHINGTON, May 23 (Reuters) - Federal banking regulators may be relying too heavily on vague standards such as the risk of negative news coverage to dictate how banks should be run, a top Republican lawmaker who oversees financial market issues said.
In a May 22 letter to four top regulators, Republican Congressman Jeb Hensarling said that, without data to measure such "reputational risk," regulators could arbitrarily tell banks how to run their business.
"The introduction of subjective criteria like 'reputation risk' into prudential bank supervision can all too easily become a pretext for the advancement of political objectives," said Hensarling, who chairs the House of Representatives financial services committee.
The letter was sent to the heads of the Federal Deposit Insurance Corp, the Federal Reserve, the Office of the Comptroller of the Currency and the National Credit Union Administration. Hensarling, an important voice in Congress on financial regulatory matters, demanded an answer by June 12.
A spokesman for the NCUA said the agency appreciates that Hensarling is "sharing his concerns" and will work to provide a response. The Federal Reserve and the FDIC also received the letter and will respond, two spokespeople added. A spokesman for the OCC declined to comment.
Although Republicans have had a hard time enacting any legislation to scale back financial regulation, they have continued to pressure regulators on how rules should be implemented.
Hensarling's letter particularly focuses on an early-stage proposal by the Fed to impose tougher regulations on banks such as Goldman Sachs and Citigroup who are doing business in physical commodities such as metals and oil. The Fed's proposal briefly mentions some concerns that banks that are in the physical commodities business could face reputational damage.
Federal banking regulators generally rely on a rating system of objective metrics to help guide regulatory decisions on banking activities and whether they are permissible.
This system, known as CAMELS, uses standards including capital adequacy, assets, management capability, earnings, liquidity and sensitivity to market risk.
Hensarling said he has started to notice references to "reputation risk" creeping into other various documents from banking regulators as well, such as guidance from the FDIC and OCC on deposit advance products.
(Reporting by Sarah N. Lynch; editing by Andrew Hay)