President Donald Trump’s executive order targeting what he calls “debanking” of conservative groups, crypto firms, and gunmakers sets up a tough balancing act for banks and the regulators that oversee them.
The Aug. 7 order requires banking regulators to remove reputation risk from their guidance and training materials, and identify banks that unlawfully denied financial services to customers.
It says financial institutions—at the behest of Washington agencies—flagged individuals who made transactions related to companies such as Bass Pro Shops or peer-to-peer payments with terms like “Trump” or “MAGA,” including after the Jan. 6, 2021, attack on the US Capitol. Trump himself has claimed
But there is little evidence that the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. forced banks to stop serving businesses solely for ideological reasons.
“The OCC has never used reputation risk as a catch-all justification for supervisory action,” Rodney Hood, then the agency’s acting head, said in March.
Now Trump is ordering those agencies, which are supposed to operate independently from the White House, to investigate banks for “politicized” debanking and weigh imposing fines or other penalties.
“That’s a very awkward place to be in, especially given how regulated our financial system is,” said Nicholas Anthony, a policy analyst the libertarian Cato Institute’s Center for Monetary and Financial Alternatives.
‘Justifiable Risks’
Trump’s “Guaranteeing Fair Banking for All Americans” executive order cites Operation Chokepoint, an Obama-era initiative that allegedly pushed banks to stop serving firearm manufacturers and other legal businesses that the administration was attempting to curtail.
It also cited the use of reputation risk as a factor in determining whether banks do business with a client.
“Such practices are incompatible with a free society and the principle that the provision of banking services should be based on material, measurable, and justifiable risks,” the order said.
The White House instructed banking regulators to remove reputation risk from their training and examination manuals within 180 days.
The Fed, the OCC, and the FDIC have already done so, though Comptroller of the Currency Jonathan Gould said in an Aug. 7 statement that his agency would begin work on a rule removing reputation risk from its regulations.
“In some ways, this isn’t so groundbreaking because since January all of the bank regulators have said this is what they’re doing,” said Julie Hill, the dean of the University of Wyoming College of Law and a former banker. “The White House wanted some credit for this happening.”
‘Thumb on the Scale’
The order goes beyond the regulators’ initial moves.
Regulators are instructed to determine whether banks under their purview have policies in place that resulted in political or religious groups getting cut off from services for reasons other than financial risks. The Treasury Department will develop a broader strategy to combat debanking.
Financial institutions that receive loan guarantees from the Small Business Administration will have to reinstate customers that improperly lost access to loans and other banking services, and the banking regulators are expected to refer any debanking based on religious beliefs to the Justice Department for potential criminal prosecution.
The extensive focus on banks’ past actions opens the door to significant financial penalties. The executive order says banks were following the orders of regulators, although there is no evidence of that, Anthony said.
The FDIC inspector general in a 2015 report on Operation Chokepoint said it found no evidence that the agency had used a list of high-risk industries to target financial institutions.
Nonetheless, the order could force banks to serve customers that pose a real financial risk but enjoy the White House’s political backing, said Graham Steele, the former assistant Treasury secretary for financial institutions in the Biden administration.
Turning away customers from the Trump-favored crypto industry, for example, may be difficult to do without getting into trouble.
“This order and some of the other moves they’re doing really put the thumb on the scale for certain agencies and certain interests,” Steele, now an academic fellow at Stanford Law School and a fellow at the Roosevelt Institute, said.
Pushing banks to serve potentially risky clients poses problems for individual banks and the financial system more broadly, said Shayna Olesiuk, the director of banking policy at advocacy group Better Markets.
“Even if a bank has certain risk management programs or restrictions in place, it’s invalidating those in a sense,” Olesiuk, a former top FDIC official, said.
Fair Lending Rollback
How the order is implemented, and whether it covers bank decisions affecting left-leaning groups and industries, will bear watching.
Sen. Elizabeth Warren (D-Mass.), the ranking member of the Senate Banking Committee, is among the critics raising concerns that banks have locked out customers due to overdraft fees, religious affiliation, or political beliefs.
Warren “is right when she says it shouldn’t matter what your politics and religion is,” Hill said.
But Warren has also argued the Trump administration is undermining its own goals on debanking by throttling banking regulators’ efforts to enforce fair lending laws.
The White House in April ordered regulators to stop using disparate impact reviews to determine whether lending policies are unintentionally discriminatory. The OCC is already complying with the order.
The administration is also dismantling the Consumer Financial Protection Bureau, which oversees compliance with the Equal Credit Opportunity Act for banks with over $10 billion in assets.
The CFPB under Biden-era Director Rohit Chopra had repeatedly raised concerns about debanking for political reasons, including in January remarks for a Federalist Society event just before Trump fired him.
Yet Trump’s order makes no mention of Americans across the political spectrum, or racial and ethnic minority groups, who may be harmed by debanking.
“There’s no mention of those Americans that are being pushed out of the banking system,” Olesiuk said.
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