In an op-ed earlier this week, former Senate Banking Chairman Phil Gramm and his co-author urged the Trump Administration to take executive action preventing banks from “politicizing” lending.  Could the White House really do this and, if it did, what then?  Even if the banking agencies duck, squirm, and evade any such orders, Democrats will continue their push to block banks from lending to those they deem as undesirable such as fossil-fuel purveyors, firearms procurers, and prison enablers.  No matter, with President Trump and Democrats each playing to their base, banks will become a very handy target taking heavy fire from both sides in the contentious campaign later this year.

First to what’s at issue.  By “politicization,” Sen. Gramm means any lending that banks do for goals apart from profitability or their own judgment of community need.  He targets efforts ranging from Democratic demands for more CRA lending to complaints about firearms and private prisons to far broader efforts to increase environmental, social, and government (ESG) lending to curtail climate change.  Much of what he wants is epitomized in S. 821, GOP legislation to revoke a large bank’s charter and choke off a payment system that defines services on grounds other than “traditional” risks.  Recognizing the obstacles to legislative action even in his old panel, Sen. Gramm turns to President Trump.

Could the White House issue some sort of executive order?  As I’ve learned to say in answer to pretty much any question about this Administration, “beats me.”  Much of what is issued by edict from the White House is unprecedented in its scope and a surprising amount of it is either upheld in the courts or acted upon following Congressional acquiescence.  Some sort of White House or Office of Management and Budget (OMB) order instructing federal financial agencies to ensure that banks make only risk-based decisions thus should not be ruled out. 

Indeed, President Trump could well dash off a tweet that is then followed by an order if he sees something on television about banks cutting off lending to coal companies in key states or denying funding for the firearms beloved of many in his political base.  OMB has not scrupled at binding the independent banking agencies to rulemaking standards aimed at sweeping burden reduction, and the grounds on which these were promulgated could well lead to more targeted “political” lending.

What would the banking agencies then do other than hanker for the days when they were largely ignored?  As independent agencies, the OCC, FDIC, and FRB need not act on an executive order or OMB directive except under certain circumstances.  However, the FRB has so far faintly promised to do its best to act on these Administration edicts and the OCC and FDIC have gone a bit farther in actually at least sort of doing so.  This has been relatively straightforward because the rulemaking guidance to date gives them considerable discretion and is, in any case, a low-profile intervention.  Standards forcing the banking agencies to enter the fray on ESG, firearms, and climate-change lending is of course a very different matter in terms of agency political risk.

It’s also another matter in terms of statutory authority.  During the Obama Administration, federal regulators attempted what came to be called “Operation Chokepoint,” an informal and even denied policy of strongly discouraging banks from lending to entities such as payday lenders or firearms distributors no matter the legality of doing so under federal or state law.  Much of the rationale here was reputational-risk based, although some of it also pertained to what the agencies believed to be credit hazard.  Regardless, the agencies walked to the edge of the line by exercising authority to tell banks to whom they may not lend for one set of social-policy objectives.  They may now be hard pressed to say that they lack like-kind authority to instruct banks that they must lend absent a risk-based reason not to do so.

At this point, Sen. Gramm’s call for executive action is most likely simply to come and go – the White House and Senate have other things on their minds.  However, what happens the next time a Democrat demands social-impact lending or public attention turns to edicts such as BlackRock’s instructions to all the companies in which it invests related to climate change?  It seems improbable that social-impact lending will escape political attention as the campaign really gets going this summer – “Wall Street” is simply too fat a target for Democrats wrestling with ways to appease environmental activists without unduly alienating purple-state voters.  A war of words over social lending from Democrats could then lead to counter Administration action – that is, a circular firing squad with banks stuck right in the middle.