Government shouldn’t engage in debanking or forced banking

December is turning into a month in which Congress and Trump administration financial regulators are attempting to tackle debanking – the closure of accounts or restricted access to financial services based on legal activities that some find objectionable. On Tuesday, the Senate Banking Committee held a hearing on debanking, and last week – following up on President Trump’s executive order on debanking – the US Office of the Comptroller of the Currency (OCC) released a report documenting restricted access to financial services by the nation’s largest banks across several industry sectors.

In attempting to combat the largely government-driven problem of debanking, policymakers are proposing both good and bad solutions. They are calling for needed measures to prevent government regulators from pressuring banks and credit unions to deny services to business sectors and individuals, as well as limiting mandated bank reporting of the large and so-called “suspicious activities” of their customers. Unfortunately, some are also encouraging “fair access” mandates on private banks and credit unions that would lead to further weaponization of the financial system.

The OCC report highlighted nine sectors that faced restricted access to banking from 2020 to 2023. Not surprisingly to those following CEI’s work, the sectors included cryptocurrency, oil and gas, and other industries previously targeted by financial regulators for “reputational risks” through Biden and Obama initiatives such as Operation Choke Point, Choke Point 2.0, and guidance documents on reducing “climate risk.”

My colleague Richard Morrison notes here that “the OCC report’s list of business sectors allegedly denied full access to financial services reads, for the most part, like a laundry list of progressive political targets,” calling it “comically lopsided.” He points out that “we would have to imagine a world in which companies selling ‘In This House…’ lawn signs, Hamas-adjacent headscarves, and copies of the White Fragility workbook were being denied financial services in order to assume some level of balance.” He concludes, “the original impetus behind the vast majority of these decisions was the organized pressure from government officials and their friends in the progressive political movement (often the same people at different times in their careers).”

Yet unfortunately, the OCC report does not give quite enough weight to the role government policy has played in debanking and implies endorsement of the supposed cure of “fair access” mandates that can lead to other forms of weaponization. Neither the report nor a news release from the OCC mentioned the role of the Choke Point initiatives from bank regulators or mandates stemming from the Bank Secrecy Act (BSA) requiring banks to file and act on highly subjective “suspicious activity reports” on customer transactions.

Commendably, in a separate action, the OCC has acted to end Choke Point-style initiatives. In October, it jointly proposed with the Federal Deposit Insurance Corporation a rule that would bar regulators from making banks target industries based on the nebulous concept of “reputational risk.” The reputational risk directives in essence directed cutting off services to industries that politicians and regulators simply disliked, and it is excellent that this criterion will no longer be used by regulators in supervising banks.

In unveiling its recent report, however, the OCC was silent on the government’s role in the debanking it has sought to correct and instead browbeat banks for making any distinction among industries. In its news release, for instance, the OCC described one bank’s expressed desire not to finance “activities that, while not illegal, are contrary to [the bank’s] values” as an inappropriate distinction. Yet there is nothing per se inappropriate in a bank or other business choosing not to do business with industries beyond its comfort level.

Take, for instance, the adult entertainment industry, which was listed as a targeted sector by the OCC report. (Morrison points out in his blog post that this is “perhaps the only category identified in the report that doesn’t fall into the ‘hated by Democrats and beloved by Republicans’ dichotomy,” but was in fact “one of the sectors subject to the original Operation Choke Point under the Obama administration.”) Basically everyone – whether they approve or disapprove of adult entertainment or porn – would agree that shopkeepers have the right to refuse to sell racy DVDs or magazines in their stores. Yet the OCC implies that the action of a bank turning down business with this sector should be illegal. “Going forward, the OCC will hold banks accountable for these actions and ensure unlawful debanking does not continue,” OCC Comptroller Gould stated in the news release.

As I have noted in National Review and elsewhere, conservatives and libertarians “have for years argued that the government should not coerce bakers, florists, or photographers to provide services for weddings that violate their moral and religious beliefs.” Yet similar “bake the cake” mandates – forcing banks and credit unions to provide financial services to those participating in every activity – are now implied by these statements from the OCC and explicitly written into GOP-led legislation such as Sen. Thom Tillis’s (R-NC) Ensuring Fair Access to Banking Act.

Tillis’s bill – highlighted in Tuesday’s hearing – would (in the words of its summary) create “a federal fair access standard designed to ensure Americans cannot be refused financial services for reasons based on their protected First Amendment rights, nor based on the business or industry sector of a legally operating business.” Yet these “fair access” mandates ignore the right of conscience that conservatives and libertarians have rightly argued should apply even for large businesses such as giant retailer Hobby Lobby.

Furthermore, many banks and credit unions specialize in servicing certain business sectors. Some even feature the business sector – say, “Farmers” – in the bank’s  name. “Fair access” mandates may add new red tape that would force these banks and credit unions to justify this specialization, as well as lead these institutions to take risky bets on industries with which they lack familiarity, threatening safety and soundness.

Tillis’s bill commendably has many features that end or curb the horrific government policies that have led to debanking. It incorporates the Financial Integrity and Regulation Management (FIRM) Act from Senate Banking Committee Chairman Tim Scott (R-SC) that bans regulators’ use of the “reputational risk” criteria in evaluating banks and credit unions.

And it takes the overdue step of increasing and adding automatic inflation adjustments to the reporting thresholds for BSA reporting requirements. The BSA’s requirement for banks and credit unions to file “currency transaction reports” (CTRs) for every transaction over a certain threshold, for instance, has not been adjusted since the law was originally implemented in the early 1970s. Congress’s Government Accountability Office (GAO) found that if adjusted for inflation, this threshold in 2023 would have been about $72,880. The GAO adds that “inflation may have contributed to the increase in volume of CTRs filed, which has increased by about 62 percent since fiscal year 2002.”

And both CTRs and the subjective “suspicious activity” reports required by the BSA likely contribute significantly to debanking, as financial institutions could be wary of customers that may generate them, even if there is no evidence of illegal activity. As the Southwest Public Policy Institute notes in a recent paper, “ordinary Americans, especially small business owners, religious organizations, and immigrant entrepreneurs, face the risk of being ‘debanked’ simply for operating in cash-intensive or politically unfavored industries.”

As I have stated before, when it comes to government action combating debanking, “removing regulatory barriers to new bank formation and preventing regulators from wielding ‘reputational risk’ are the best ways to deweaponize the financial system.”