Debanking is a Government Problem

by Phil Kerpen

Under the Obama and Biden administrations, bank examiners were weaponized to blacklist certain politically out-of-favor customers.

A comprehensive House Financial Services Committee report found digital asset businesses in particular were improperly targeted along with the usual businesses the left hates: gun shops, low-dollar lenders, and vape shops, among others.

The construct used to cut these businesses and various other political opponents off from the banking system was “reputational risk,” a concept so elastic no actual criminal or even improper activity needs to be found. Just the subjective assertion something might look bad to somebody someday was enough, and banks could face penalties for not complying. Even worse, banks federal authorities directed to terminate customers were also prohibited from communicating why they had done so or even that it wasn’t their own decision.

That created a widespread misperception it was anti-conservative political animus by the banks themselves that caused the waves of debanking under Obama and Biden. In turn, that has spawned legislative efforts at both the state and federal level to prohibit debanking. But that misdiagnoses the problem – government intrusion – and therefore adopts an ill-fitting solution. We risk a 50-state patchwork of inconsistent rules that will make banking more difficult and expensive and, ironically, cause a reduction in financial services that are available to the very customers politicians want to protect.

To think about this issue clearly, start with this basic truth: banks want customers. They want to do business with almost every possible lawful customer, because they don’t make money by banning customers. Moreover, in the highly unusual circumstance in which they do refuse to do business with someone, it is likely well-founded. And we should be cautious of a law that would require a bank to let an open Klansman or a Communist in full uniform open an account. We don’t need to sacrifice the principle of freedom of association to prevent the debanking problems of recent years. We just need to remove the ability of the government to abuse its power.

The Trump administration has taken significant steps in that direction via proposed regulations to prohibit the use of reputation risk. The Federal Reserve and other regulators should go further and remove all references to reputational risk from supervisory programs.

Even more importantly, Congress needs to act so a future Democratic administration cannot reverse Trump’s reforms and start leaning on the banks again to punish their enemies. The simplest step would be for the Senate to pass the FIRM Act, a bill sponsored by Rep. Andy Barr of Kentucky and Senator Tim Scott of South Carolina that would statutorily prohibit federal regulators from referencing or using “reputational risk” in any guidance, examination manual, rule, or supervision. It passed the House in July and awaits action in the Senate.

Senator John Kennedy of Louisiana has proposed a related bill called the Streamline Act that would reduce compliance burdens and the opportunity for mischief by future administrations by raising the reporting thresholds for currency transactions and so-called “suspicious activities” and indexing them for inflation going forward. Inappropriately low threshold amounts mean an always-available stream of paperwork for government abuse.

States that are tempted to act on debanking should resist the urge to adopt their own mandates and requirements, because the real culprits are federal employees who are outside their purview. The most productive action state legislators can take on this issue would be to pass resolutions of support for these federal bills to help get them over the finish line – and to help keep the spotlight on the real problem.