As we noted last week, one of the next executive orders flying off the resolute desk in the Oval Office is likely to demand an end to debanking. In sharp contrast to the executive orders eviscerating DEI, the independent banking agencies need not follow a presidential debanking order. This affects their independent safety-and-soundness powers unlike personnel policy subject to the Executive Branch. But, independent or not, the banking agencies are nothing if not politically aware and at least two of the three agencies are also now politically-aligned with the president. It’s thus not a question of whether there will be anti-debanking standards, but rather what they do to banks trying to make a buck.
Wanting debanking doesn’t mean that getting debanking will be easy or inconsequential to the thousands of banks that never consciously debanked a dollar’s worth of deposits. One of the thorniest debanking problems derives from the fact that banks and other financial companies quite properly make business decisions based on qualitative factors, not just the quantitative ones on which anti-debanking efforts relied. Some of these qualitative factors are quite simply what makes some bankers better bankers than other bankers when it comes to decisions about whom to serve how based on expectations of future profitability. As history all too often proves, strategic insights are often at least as subjective as quantifiable.
Banks have also long chosen not to serve complex businesses that require costly underwriting and risk-management capacity unless they have the economies of scope and scale that make this profit-viable and sometimes not even then. Did banks “debank” crypto companies because the banking agencies made them do it or were the banking agencies right to demand additional policies and procedures that many banks decided weren’t worth the bother for a small, high-risk, and dubious sector with a troublesome inability to know with whom it does business?
Debanking is also about more than making loans. Big financial companies exert powerful influence over the economy based on capital-market activities, including trading. This is at least as much a business based on “gut” as on data even though debanking demands have also required quantitative rationales to avoid sanction.
Another tricky debanking judgment surrounds demands sure to come that banks exclude climate risk from business decisions. A last-minute “fair access” rule at the end of the first Trump Administration barred “geographic discrimination” to prevent debanking based on what that Administration and this one think are erroneous, ideological expectations of climate risk. We can certainly debate how much natural-disaster risk is due to climate change and how much is bad luck, but bad luck tends to come more frequently to those living near the woods or the water where insurance is also in short supply. Must banks absorb these risks regardless of cost?
Banks must also comply with federal law when it comes to suspicious activities even though proposals and some state laws force banks to tell anyone they debank when this has befallen them. Banks handle money and miscreants love money so banks perforce are saddled with problematic customers. Policies that require banks to serve anyone who staggers in with bags of crumpled small-denomination bills or to tell anyone about being under suspicion are more than simply misguided – they enable still more ill-gotten gains. Banks must be allowed to debank customers with high-risk profiles — how else are they to meet their obligations to stand in for law enforcement when it comes to money laundering, prevent elder fraud, or do so much else demanded of them by even the stoutest debanking advocates?
Debanking opponents do, though, have a clear, justifiable point when bank regulators require or “encourage” banks to avoid certain customers on a categorical basis. This was clearly the case in the infamous Obama-era “Operation Chokepoint,” where regulators blacklisted firearms companies, payday lenders, and others they deemed illegal or simply anti-social. Using safety-and-soundness rules to accomplish social-engineering or, even worse, political goals is indefensible. And, giving examiners discretion to do so is not just irresponsible, but also dangerous given their habit of missing risks that really matter.
Republicans and progressive anti-debanking advocates such as Rohit Chopra want a “free and fair” marketplace. Banks are, though, exercising their free and fair rights to do business when they pick their customers for strategic or risk-management reasons even if these reasons do not always comport with simple, quantitative justifications. But bank regulators and supervisors are out of line if they demand that banks cease doing business with customers banks would otherwise seek or force them to serve customers likely to prove unprofitable or, worse, criminal. The best way to block debanking is to demand this of bank regulators and supervisors, not of banks.