Politicians in several states and of varying ideologies are turning the screws on financial institutions, attempting to use them as pawns to force themselves into the culture war headlines. It is everyday customers, however, who stand to lose.
“Debanking” laws in Florida and Tennessee, which went into effect July 1, are the latest examples. Both laws insert government into the relationship between customers and national banks to advance agendas that directly conflict with federal law. As retribution, state government bureaucrats brandish investigations, enforcement actions, fines, and even customer lawsuits.
Regardless of November’s election results, the crossfire will continue. Recent letters from U.S. Department of Treasury officials as well as lawmakers from both parties warned of the harm debanking policies pose to “U.S. national security, and the U.S. and international financial systems, as well as economic stability and security.”
Debanking policies are supposedly meant to prevent perceived discriminatory practices by banks based on individuals' political, social, or religious affiliations—or even "objectionable" industries. The push for these laws revolves around their assumption that banks close accounts based on clients' values or beliefs.
But the consequences from politicians' zeal to attack financial institutions are real. The laws in Florida and Tennessee, among others developing, threaten consumer protections and access and undermine national banking standards that have been a cornerstone of our financial stability and economic prosperity since 1863.
Debanking laws hinge on a false premise, and their proponents ignore several realities.
Financial institutions are already subject to stringent federal regulations and oversight to prevent discrimination, mitigate risk, and protect consumers and the financial system. Banks are required by law to conduct risk-based assessments that consider factors like legal, credit, market, reputational, and regulatory risks—not personal or ideological affiliations. Violations of these long-standing laws carry significant penalties.
No serious analysis has even been attempted to show that banks are targeting any groups or political activists of any persuasion. A few cases have received some media attention. But those were driven by the clients' high-profile status, which also allowed for outlandish accusations. In some instances, federal anti-money laundering regulations specifically prevent banks from giving details to customers about why an account might be closed. That restriction can cause understandable frustration, but also can be used as fodder to falsely claim other factors are at play.
Politicians from both parties use those claims for political theatre and to advance unworkable, potentially dangerous, legislation.
Progressives pressured banks to limit their relationships with energy and firearms companies, for example. Simultaneously, conservative states passed legislation restricting the ability of states to do business with banks if they do so. Segments of the Right are also now keen on using government power for political ends, in this case becoming eager to punish banks that engage in whatever they judge as "woke" activities, often including companies’ internal diversity programs, without regard for specifics.
When those ends become embedded in legislation, the real-world legal implications are dire for both customers and the strength of the banking system.
Wrongly discouraging or penalizing risk management under the false banner of political discrimination directly conflicts with the Bank Secrecy Act and anti-money laundering statutes. It could impede banks' ability to identify suspicious and potentially illegal activity, weakening national security efforts.
States continuing to meddle with existing banking regulations will create a patchwork of varying—and often conflicting—regulatory regimes, each with rules about who banks can or cannot serve based on political preferences. That will drive how banks manage risk and serve customers, especially in interstate commerce.
The resulting confusion could undermine the efficiency and accessibility of financial services and interfere with existing security standards—including those designed to combat money laundering and other illicit activity. Thankfully the mandates were discussed, albeit all-too briefly, in Treasury Secretary Janet Yellen’s recent testimony before the U.S. House Committee on Financial Services.
Forcing subjective risks into banking decisions is regulatory overreach that undermines the fabric of a free-market economy built on competition and consumer choice. Long-standing federal rules for national banks have served Americans well, enabling the rise of deposit-taking, lending, and payment markets. That stability directly enables America's success.
Banking is a cornerstone of economic activity. And access to banking services is the foundation of financial security and opportunity—whether it is mortgages, small business credit, investments, or simply managing personal savings. If onerous regulations make banking products difficult to offer, the services and products families need would be the most affected.
Ultimately, the most important issue is not about protecting financial institutions, but about safeguarding the interests of every American who relies on a robust, dependable banking sector.
