Regulating 'Debanking' Practices: Look to the Authority of Regulators
In a move aimed at keeping business out of politics, the U.S. government, under President Trump, has issued an executive order to curb the politicization of banking services.
The order comes in response to the practice of "debanking," where banks close accounts or refuse services based on political beliefs or affiliations. This practice, historically influenced by federal regulators, has raised constitutional and fairness concerns due to its reliance on subjective criteria outside of financial risk assessment.
The executive order seeks to address this issue by:
- Prohibiting the denial of financial services based on political beliefs or affiliations.
- Removing "reputational risk" language from federal regulatory guidance to prevent its use in excluding customers for ideological reasons.
- Directing regulators to identify and potentially penalize banks that previously engaged in politically motivated account closures or refusals.
- Requiring review of complaint data and possible referral to the Department of Justice if unlawful debanking based on religion or politics is found.
Banks, primarily focused on opening accounts, not closing them, are cautious about entrusting savings. Politics can lead to loss of business, and they avoid it primarily to manage reputational and regulatory risks and maintain neutrality in service provision.
Regulators, however, have often substituted their politics for sound oversight. They have used "reputational risk" as guidance to pressure banks to cut ties with certain clients deemed high risk due to political or ideological factors, often without explicit legal authority.
The term "debanking" became popular in 2023-2024, as it refers to the act of banks closing accounts. Banks are in the business of matching savers' wealth with credible borrowers, and they must choose their customers wisely, depending on the political affiliations of regulators.
In Republican leaning U.S. locales like Texas, banks have experienced trouble if viewed as unfriendly to oil & gas interests. Cryptocurrency and crypto adjacent businesses were unpopular during the Biden years, while gun and gun manufacturers were unpopular during Barack Obama's presidency.
Notably, the executive order does not target banks attempting to mix politics and business but rather focuses on overly politicized regulators. President Trump asserted that J.P. Morgan Chase and Bank of America discriminated against him, while AB InBev executives may have overlooked the political affiliations of influencers in business agreements.
The order, however, does not exempt banks from complying with anti-money laundering (AML), anti-terrorism, and Bank Secrecy Act (BSA) requirements, which impose legitimate regulatory criteria for account refusal or closure unrelated to politics.
In summary, the executive order aims to ensure objective, risk-based banking decisions free from political ideology considerations. Regulators monitor and can sanction banks that unlawfully refuse or close accounts based on prohibited criteria, ensuring compliance with anti-discrimination principles while balancing legitimate AML and compliance concerns.
John Tamny, commenting on the situation, emphasized the importance of maintaining neutrality in financial services and preventing the politicization of debanking practices. He stated, "The regulation of banks should focus on general-news items like financial stability, not politics or personal political affiliations."
In light of these concerns, Donald Trump's executive order on the matter in 2023 aimed to protect businesses, particularly those in the finance sector, from facing discrimination based on their or their clients' political views. This move signifies a significant step towards ensuring fairness and upholding the principles of sound business practices in the realm of politics and finance.
