Yesterday, President Trump released an executive order that would “guarantee fair banking for all Americans.” First reported by the Wall Street Journal a few days ago, this order is designed to stop efforts by the federal government to limit and block banking services to organizations and people on the political right.
The President’s executive order lists general examples that have occurred in the recent past, including federal government suggestions that financial institutions flag individuals who made transactions at companies like “Cabela’s” and “Bass Pro Shops,” or made payments that included terms like “Trump” or “MAGA.” Other examples cited by the administration include the closure by Bank of America of a Christian organization’s bank accounts based on that organization’s religious beliefs, and bank investigations of individuals involved in the January 6, 2021, attack on the U.S. Capitol. Even the President himself has asserted that both he and the First Lady have experienced what is called “debanking,” noting specific experiences of being blocked from opening bank accounts at JP Morgan Chase and Bank of America not long after leaving office in 2021.
As researchers from liberal and conservative think tanks have observed, as well as leading political leaders from both the left and right sides of the aisle, debanking is a problem, and has been one for a long time now. Both cite similar regulations that helped create the environment that allowed these actions to take place, but each side cites complaints from very different sorts of people. While conservatives cite negative experiences from people in MAGA world and other organizations in their ecosystem, liberals note experiences from lower income and less educated Americans without steady employment as a bigger concern than customers deprived of service for political or business philosophies. According to Aaron Klein from Brookings, 10% of Black, Hispanic, and Native American households are unbanked, and those with disabilities are even more likely to lack a bank account.
Both sides note the negative effects that anti-money laundering (AML) laws have had on the increasing prevalence of debanking, including Bank Secrecy Act rules and Know Your Customer regulations. Suspicious activity reports (SARs) are another onerous regulatory requirement, where banks must report when they have reason to believe their customer is engaged in dubious behavior. These reports have proliferated over the years, going from less than 300,000 reported SARs in 2003 to over 2.5 million in 2023. Each SAR requires at least two hours of processing time by banks, though some banks claim this is actually more like 20 hours per SAR filing. So, one can understand how banks can easily lean toward avoiding taking on customers who may take more work for them to handle than others. Those without consistent employment, who make more cash-heavy transactions (like tipped workers), and tend to make more “suspicious” (in the eyes of the government) transactions come to mind.
These efforts were supercharged over time, first by actions under Operation Choke Point in 2014 to go after firearm dealers, payday lenders, and other groups with a perceived high risk for fraud and money laundering. This was followed more recently by Biden Administration efforts informally tagged as “Operation Choke Point 2.0” that targeted crypto, conservative organizations, and other groups seen as having potential reputational risks. Both these and prior policy efforts relied on a 1996 rulemaking that noted “reputational risk” as a key way to measure a bank’s operations, and that “negative publicity” could affect a bank’s reputational risk.
Utilization of reputational risk, a qualitative assessment that is hard to accurately measure, opened the door to all kinds of mischief, including the ability to target institutions and organizations that were not supportive of the politics of the party in power at the time. Which is exactly what happened during the Biden Administration.
The President’s Executive Order specifies actions that would seem to rectify issues that have come up in recent years. It blocks the denial of access to financial services on the basis of political beliefs and affiliations and requires the use of objective risk-based analysis to make these individual decisions. It also removes the use of reputational risk in the analysis of banks or financial institutions.
The latter issue of ending the use of reputational risk in financial institutional analysis is an obvious one, as it removes language from federal regulations that future administrations could have wielded against organizations deemed “unsavory” (translation: politically opposed) in their worldview. The former issue merits further discussion, however.
By blocking the limiting of access on the basis of political beliefs, the executive order adds more restrictions to financial institutions on whom they can decide to provide services. Previously, banks—like most private entities—had wide leeway on who they can work with. A bank account is not a protected right. Nor is being served at a restaurant, or being able to buy a shirt at a department store. The Civil Rights Act rightly added race as a protected class that limited this “right of refusal.” This EO effectively expands government intervention into banking in new ways that the Trump Administration may come to regret. A future Democratic administration could, for instance, require a bank to engage in business with unsavory individuals or organizations that serve a left-wing social cause. Or the government could allege that denial of a loan application was the result of conservative political bias, even if that decision had been made purely for financial reasons.
In other words, the administration should beware of unintended consequences. It is prudent to scale back subjective regulatory metrics by ending the qualitative reputational risk analysis. But allowing the federal government to expand its regulatory authority by effectively telling banks who they are required to serve could bring unwelcome winds from the wrong direction.