All legal businesses deserve banking services

One of the most promising developments to come out of the banking regulatory agencies recently is a movement away from the concept of reputational risk. The FDIC, OCC and the Fed all announced earlier this year they will no longer consider the concept when examining banks; furthermore, they are removing reputational risk from their supervisory materials and training manuals. .Reputational risk has long been a suspect concept, in my view. It is a tool regulators use to enforce prejudices against certain industries, such as payday lenders, tobacco companies and telemarketers. These companies and others turned up on a list of disfavored companies in a U.S. House committee investigation conducted last December on the FDIC’s involvement in “Operation Choke Point,” which was a concerted effort to deny credit to select businesses. Banks should be allowed to service legal businesses without the threat of regulatory reprisal. On Aug. 7, President Trump signed a “debanking” executive order which prevents banks from dropping customers for political or religious reasons. But the threat of being denied banking services or having them suddenly dropped is more about regulatory pressure than it is about banks electing to discriminate against certain businesses. Charges during the last couple of years that banks were shunning crypto businesses were mostly aimed at very large banks, but banks of all sizes can be pressured through money laundering laws into dropping some companies. Readers know that such laws require banks to keep an eye out for unusual business dealings and to file suspicious activity reports should they suspect something’s amiss. Banks are encouraged to file additional SARs on the same business if suspicions persist. A Bank Policy Institute memo from last December explains regulators would expect the bank to close the account, without explanation to the customer. While regulatory agencies could go back to considering reputational risk in the future, a bipartisan group of elected officials has introduced legislation in the Senate and the House to permanently prohibit bank regulators from considering reputational risk. Perhaps Congress will pass the law and it will include a better approach to anti-money laundering that doesn’t essentially require banks to close accounts for legal businesses. People who believe some businesses shouldn’t be banked should encourage their elected officials to pass laws prohibiting those businesses from operating. But as long as a business is legal, no banker should have to fear reprisal for servicing them.