Pending Senate Bills Can Address Debanking

A series of bills have been introduced with the intent of addressing the problem of debanking. Two bills, the FIRM Act and the Ensuring Fair Access to Banking Act, introduced by Senators Tim Scott (R-Sc.) and Thom Tillis (R-Nc.), respectively, have been introduced as legislative fixes.  

Arbitrary debanking is not a manifestation of market forces. Banks have no incentive to disrupt normal customer relationships without external interference. Government regulators initiated debanking under the Obama administration.  

Bank regulators use a framework known as CAMELS to assign regulatory ratings to banks. The M in CAMELS stands for management and encompasses the measurement of reputational risk. If regulators find a bank’s reputational risk management deficient, a bank can suffer downgrades that might impact its ability to expand, face more frequent and stringent assessments, and pay higher premiums for deposit insurance, to highlight a few consequences.  

Assessing reputational risk is inherently subjective, unlike assessing capital adequacy, asset quality, liquidity, and interest rate sensitivity in CAMELS, which are all empirically assessed. 

In 2014, A House Oversight Committee report documented how regulators pressured banks into debanking businesses in politically disfavored industries such as tobacco, firearms, and alternative consumer lending. This became known as Operation Choke Point.  

Debanking continued under the Biden administration with Operation Choke Point 2.0. A House Financial Services Committee report released earlier this month detailed how Biden-era regulators stifled digital asset firms from obtaining regulatory clearance to commence operations and used deliberately unclear guidance to discourage banks from engaging in digital asset activities.  

The report noted how the Biden SEC adopted an aggressive “enforcement first” posture against market participants in the digital asset space, pressuring the financial institutions they bank with to unaffiliate. In addition to firms being debanked, the House Financial Services Committee also cited how high-profile founders, CEOs, and key employees at digital asset firms wound up being debanked. 

According to the Center on Transnational Business and the Law at Georgetown Law Center, the SEC under Biden initiated four times as many enforcement actions against digital asset firms than under the first Trump administration.  

A politically motivated administration can broadly interpret reputational risk to target certain industries and individuals, as seen during the Obama and Biden years, threatening free enterprise and individual liberty.  

Banks are already invested in their reputation since they have a duty to generate value for their shareholders. Banks are careful not to damage their reputation in ways that might adversely affect their client relationships or investment returns. That’s why banks have internal protocols to prevent and detect money laundering, conduct due diligence on clients, and adhere to Know-Your-Customer laws. It does not make sense for regulators to assume oversight of banks’ reputations when they have no skin in the game nor any profit motive to follow.  

Senator Scott’s FIRM Act would directly fix regulator-driven debanking by creating a statutory prohibition on bank regulators from using reputational risk criteria in any capacity to assess banks. All guidance and rulemakings incorporating reputational risk would be eliminated.  

Senator Tillis’ Ensuring Fair Access to Banking Act goes further. In addition to eliminating reputational risk, it would also reform the antiquated Bank Secrecy Act (BSA) of 1970 for the first time by increasing reporting thresholds for suspicious activity transactions to account for inflation.  

Higher caps on reporting threshold triggers would decrease the number of benign financial transactions that are flagged for potential engagement in illicit finance. 

Data from FinCEN shows that millions of Suspicious Activity Reports (SARs) are filed annually but fewer than one percent of these reports warrant a follow-up from law enforcement. These filings are serious since they can be used to justify debanking customers. 

Other bills such as the STREAMLINE Act, co-sponsored by John Kennedy (R-La.) and Tim Scott, would raise BSA reporting thresholds and index them to inflation annually following enactment.  

One point of contention with the Ensuring Fair Access to Banking Act is the creation of a fair access standard for banking services. Businesses should retain discretion when deciding who to do business with.  

Similarly, allowing state attorney generals to initiate litigation against banks will not address the root cause of debanking, but only enrich attorneys through costly and long-drawn litigation. These costs will likely be passed down to consumers.  

Instead of penalizing banks for adhering to an unfair and arbitrary system of oversight and supervision, regulators need to step back and allow market forces to define relationships between banks and their customers.

Debanking started due to regulatory interference in the private sector. The solution is to remove the government from banking rather than inviting it to wield more arbitrary power and unleash more havoc on ordinary citizens and businesses.