At the World Economic Forum last month, President Donald Trump was right to elevate the plight of businesses and consumers losing access to banking. The rise of “debanking” is a serious issue. Fortunately, President Trump can work with Congress to find a solution that benefits both consumers and banks.
Banks, like all businesses, want certainty. So do customers. But Washington has left both hung out to dry with outdated laws, heaps of regulation and no transparency requirements on increasingly aggressive regulators. The result is a banking industry perversely incentivized to close customers’ accounts – sometimes without the ability to even discuss their decisions with impacted customers.
Under the Bank Secrecy Act (BSA), banks must adhere to Know Your Customers (KYC) and Anti-Money Laundering (AML) guidelines obligating them to build profiles on their customers and report to the government any activity that could be tied to criminal enterprises by filing Suspicious Activity Reports (SARs). These requirements have led to an accepted yet unintended consequence in the financial services industry. Nevertheless, banks are also prohibited by law from disclosing SARs to customers, furthering misconceptions between banks and their customers.
Compliance with these complex regulations and the gag orders imposed on banks is fueling a false impression that banks—who ultimately want more customers, not fewer—are somehow arbitrarily closing the accounts of certain individuals or businesses in pursuit of advancing political agendas behind closed doors.
In recent years, many state legislatures have tried to fill the vacuum left by federal policymakers with their own legislation to address debanking. The lack of transparency with customers, for example, motivated responses in Florida and Tennessee that have added layers of regulatory bureaucracy, increased the likelihood of investigations (the cost of which will be borne by taxpayers and bank customers) and, in the case of Tennessee, will open the floodgates to frivolous lawsuits. What state laws have not done and cannot do is solve the problem created by federal law.
In rare instances, the federal government is best situated to address the lack of clarity in the national regulatory framework. This is one of those instances, and Congress and the Trump administration have an opportunity to fix it. The onus lies on the federal government to enact clear, consistent and transparent rules and regulations regarding fair access to financial services—and it must.
The consequences of inaction are tremendous. Imagine if national banks had to follow 50 different versions of these laws—with different rules in every state—on top of the existing labyrinth of regulatory requirements and federal laws by which national banks are supervised and governed. National banks would have to pick and choose where they could comply with the law, and where they might have to stop doing business, compromising the access to banking consumers and businesses across the country count on.
Washington should start by addressing concerns around fair access to banking—before more harmful state-level legislation takes hold—and reform overly burdensome laws, like the BSA, that incentivize banks to close accounts out of fear of getting it wrong and paying the price.
Additionally, federal regulators should provide clear and actionable guidance to banks, ensuring these institutions get what they need to serve their customers lawfully, while making sure the enforcement environment does not unnecessarily debank customers.
Senator Pete Ricketts (R-NE) noted as much in his statement during the Senate Banking Committee hearing on the issue this week, stating, “When you take an approach where you weaponize government, it's actually bad for the regulatory scheme in general because players, you know, companies who are good that are trying to stay in business and actually follow the rules, are discouraged because the regulators are acting in a political manner.” Congressional oversight is essential to ensure this guidance is consistent and effective—and not driven by the political winds of one administration or another.
Policymakers and regulators at the federal level have a responsibility to address the challenges of debanking in a way that bolsters, rather than divides, our financial system. Without action, we risk unraveling the very foundation of our nation’s economic strength and resiliency. The stakes are too high to get this wrong.
