America’s banks are immensely self-conscious. That is the finding of a report, published recently by the Office of the Comptroller of the Currency (OCC), on the subject of debanking. But for the industry’s insecurities, private firms should not primarily be blamed. It is true that, as the report notes, banks have deprived Americans of financial services, the pattern of such actions being, at times, stochastic. Pervasive regulatory strictures distorted what ought to have been ordinary business decisions, giving banks little choice but to court regulators at the expense of their existing and would-be clientele.
“Reputation risk” appears as the villain of the OCC’s review. This standard, which requires banks to consider nebulous, ill-defined reputational factors in their business operations, has served as a tool of adventurous regulators to smother businesses of which they disapprove by rendering them unable to access financial services. During Operations Chokepoint and Chokepoint 2.0, cryptocurrencies, religious organizations, payday lenders, firearms dealers, and more were the objects of regulatory scrutiny. Arbitrary regulatory standards deployed against otherwise legal enterprises and implemented by means of suggestion and threats, and not clearly promulgated rules, have proven a danger to the ordinary pursuits of the American people.
The OCC verifies the political source of the winds which battered the banks to and fro. “This report confirms that value judgments and assumptions regarding the current views held by elected officials and policy makers can factor into banks’ decision making,” the OCC relates. As the opinions of regulators shifted, so, too, did internal debanking policies. Moreover, the report examined the years 2020–2025. The timeframe renders its discovery of many instances of debanking unsurprising; this was, save for a few months, the administration of Joe Biden, whose administration undertook Operation Chokepoint 2.0 among other initiatives to suppress dissenters from Democratic orthodoxy. Wells Fargo knew well that “[u]nder the Biden administration, banks could face greater supervisory pressure to move away from lending to the firearms industry.” Financial regulators hold vast, granular, and often vague powers; regulated institutions, when considering whether to hazard vexing a bureaucrat, understand that retaliation will likely follow noncompliance, no matter how slight or dubious the alleged infraction.
The immediate reasons for which Americans were debanked are diverse and, in some instances, seemingly head-scratching; but their unifying principle was subjectivity, rooted uneasily in the loose sediment of “emotive responses and reactions from the general public or stakeholders.” The disapprobation of social media, enraged activists, critical reporters, and speculation about whither public opinion might be trending—all influenced banks to sever relations or deny services to disfavored entities. The OCC’s report found that bank employees routinely escalated customers holding non-mainstream viewpoints, using vague reputation policies to deny Americans fair access to financial services.
In the main, such paranoia, the parent of mercurial debanking practices, originates in the administrative office of Washington, D.C., and not in the C-suite. The ideologically minded administrators enforcing reputational risk, ever the bullies, have so intimidated banks that overcompliance became a business necessity. The OCC notes that many internal “discussions [at banks] largely consisted of unsupported guesswork about how stakeholders may or may not react to particular customers.”
Although often overlooked, another set of players appears repeatedly in the OCC’s report: banks’ internal reputational risk offices and those who staff them. Very often, they advised debanking and intervened to direct banks away from contracting with law-abiding Americans. Created to contend with federal regulations, they adopted the character one would expect: intolerant, risk-averse, ideologically askew. The institutional incentives and psychological proclivities at work drive toward compliance, and not fair treatment of customers—toward sclerosis and control, and not dynamism and liberty.
To remedy this state of affairs, reputational risk must be dispensed with. The Trump administration has labored manfully to exorcise the standard. Congress, however, must act to achieve its full expungement—the aim of legislation introduced last year by Sen. Tim Scott (R-S.C.). Someday, inevitably, a politician with a taste for bullying—a desire to initiate Operation Chokepoint 3.0—will ascend to the presidency. He must be deprived of the statutory authority to license the coercion of financial institutions, whose minds must be put at rest—must be freed—as they endeavor to serve, to the best of their abilities, the American people.
