As we noted, the OCC last week loosed an anti-debanking fusillade at nine of the nation’s biggest banks. Among other things, the agency sanctions banks for deciding on customers based on “values” and for evaluating relationships affected by negative press coverage. The OCC demands that key business sectors be served without scruple even if, as with “adult entertainment,” there may be good reasons to demur. Some “adult entertainment” may be legal, but much isn’t and even that which is legal may still be reprehensible. Must a bank owned by devout Christians still lend to support activities it believes to be sinful? Should it do so, its community is likely to abhor the bank, unaware of the OCC’s policy as it rallies against the bank in righteous rage. To meet the OCC’s edict and still adhere to risk-management policies, would banks need to ensure – God knows how – that no performers were trafficked and the most vile scenes were all made with images, not children? Can the OCC in fact order banks to eschew values, subjective business judgment, and political opinion? I think and hope not.
We’ve been in such a debanking frenzy that a fundamental examination of what it means has never been overtly undertaken by those demanding an end to it. Most Members of Congress are rightly moving cautiously with a focus largely on ending “reputation risk” reviews, while banks reasonably point to Obama and Biden era no-banking orders to show that the fault lies not with them, but with Administrations gone by. The Trump Administration strongly agrees with this assessment – see our report on the prayerful CFPB meeting last week appealing both to the heavens and law enforcement for remedy. However, blanket anti-debanking demands may well smother not just sound banking, but also a bank’s constitutional rights and the beneficial effects of a truly free market.
In my view, the OCC’s edict goes so far as to deny banks the right of free expression – that is, deciding with whom they wish to do business within the boundaries of laws such as those against discrimination or money laundering. The Supreme Court has established that a business’ values based on religion are a form of free expression to which a firm is entitled when deciding with whom to do business as long as no anti-discrimination rules are transgressed. Thus, it seems that a bank owned by Christians is as free as individual Christians to do business based on values.
More broadly, in Citizens United, the Court found that political contributions are a First Amendment right of corporations, which are to be treated here as persons. How, then, to defend the OCC’s ruling that national banks must do business with political action committees and similar entities? Must a bank give money to all political causes lest it fear the OCC will deem an underwriting concern to be debanking? Must it do business with all political entities even if it disputes their views – think for example of Holocaust deniers and organizations dedicated to supporting those accused of racism? What if the bank decides, as do some citizens, simply to stay out of the political fray? The OCC thinks this is debanking, but one might well call it a clear example of free expression.
Complaints about debanking and related restrictions on asset managers and proxy advisers are in part a reaction to the concentrated economic power enjoyed by some big banks, asset managers, and proxy advisers. The solution to this is not mandating that these companies finance all forms of business which policy-makers hope are lawful. Instead, effective antitrust policy is the answer. The Obama and Biden Administrations did indeed demand debanking by business sector. The answer is never to do that again and to let banks decide with whom to do business based on sound underwriting, risk tolerances, community needs, and, indeed, anything they want as long as it’s also sound and legal.
For good measure, regulators could adopt a standard proposed last year by CFPB Director Chopra that Trumpers should actually support: Banning all financial companies from sanctioning individual customers based on rights expressed by that customer that are protected by the First Amendment (e.g., free expression, religion, political preference). The Bureau was also right to sanction PayPal for curtailing Venmo to customers making political payments the company disliked. This is, though, very different from mandating that a company itself must make payments even to those it abhors.
There is a legitimate reason to debate whether “stakeholder” capitalism is preferable to Milton Friedman’s mantra that companies must always maximize shareholder return. There is, though, no good argument I know in favor of state capitalism – that is, economic systems in which the state dictates to whom private companies may or may not lend. Operation Chokepoint was indeed state capitalism and has been rightly rejected. But the latest debanking edict essentially orders national banks to lend to any company in all the sectors it names and, perhaps, any others in which credit denial could be construed as political or “values-driven.” That’s a bad way to go both for sound banking and the economic security Secretary Bessent rightly prioritized at the last FSOC meeting.