On July 30th, America First Policy Institute released a white paper on debanking, a regulatory trend that stripped law-abiding citizens and businesses of their banking privileges during the Obama and Biden administrations. While debanking emerged during the Obama years, the issue rose again under the Biden administration after the first Trump administration took steps to undo some of the damage.
The white paper thoroughly explains the roots of debanking and the mechanisms by which it exerts influence over banks’ decision-making, then proposes solutions to prevent its revival under another administration.
The paper explains how Operation Choke Point began targeting payday lenders, citing the risk of money laundering and fraud associated with the industry. While no formal rulemaking was promulgated, financial regulators issued informal guidance tacitly warning of penalties against banks servicing politically disfavored industries. Under the Biden administration, Operation Choke Point 2.0 expanded its overreach by targeting crypto dealers.
The paper’s authors highlight the weight of supervisory guidance in banking compliance practices. While federal regulators issue non-binding guidance, banks treat those statements seriously, as any perceived departure from guidance could be leveraged to their detriment during future supervisory exams.
Bank supervision now assesses non-financial factors, such as reputational risk. The commonly used CAMELS framework emphasizes evaluating banks based on capital, assets, management, earnings, liquidity, and sensitivity to the market. The management component is where reputational risk creeps its way into formal bank supervision. This has enabled regulators to shape banks’ behavior into complying with politically motivated agendas to debank disfavored individuals and businesses.
The paper’s recommendations for rectifying the issue have started to gain traction. In March, the OCC announced it would remove references to reputational risk in supervisory materials and examiner booklets. The FDIC followed later in June. The authors also call for clear guardrails in the form of a federal fair access standard that prohibits financial institutions from making politically motivated business decisions to protect them from regulatory coercion. The first Trump administration attempted to formulate such a rule toward the end of the president’s term, only to see it withdrawn by the Biden administration.
Other suggestions include codifying guidance in written form so that regulators abide by due-process principles in bank supervision. Additionally, reform and modernization of decades-old laws such as the Bank Secrecy Act (BSA) and the Anti-Money Laundering Act (AML) are needed. These laws penalize cash-heavy businesses, charities, and non-profits. They predate the advent of convenient, innovative, and secure technologies that banks now widely use to detect and prevent fraud and money laundering. It is only reasonable that such laws should be amended to reflect the evolution of financial security.
The paper’s authors make a clear case for ending debanking and enacting policies to quash the issue once and for all. Bureaucrats should never decide who merits access to financial services. Banking is a ubiquitous part of modern life, and weaponizing it against lawful businesses and individuals denigrates the rule of law and the free market principles that define American enterprise.
The full paper can be read here.
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Author: Andrew Gins
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