Nicholas Anthony
Debanking is generally characterized as the sudden closure of a financial account. The causes of debanking, however, are just as important as the end result. And it’s for that reason that it may be time to refine how debanking is discussed.
When looking at different cases of account closures, there tend to be two types of debanking taking place. On one hand, there are the decisions of private businesses about how they wish to conduct their day-to-day operations. On the other hand, there are the decisions of government officials about how those private businesses should operate. For that reason, the policy conversation would likely benefit by distinguishing between what might be called operational debanking and governmental debanking (Table 1).
These distinctions are not perfect, but they are important for policymakers to recognize if the problems around debanking are to be fixed.
Operational Debanking
Operational debanking is what occurs when a financial institution chooses to close the account of a customer because it is no longer in the institution’s individual interest. It could be because the customer violated part of their contract with the institution or because the institution decided to move in another direction.
Let’s consider a few examples.
Bank of America made headlines in 2018 when it announced that it was stepping away from certain gun manufacturers. According to reporting at the time, this decision was made after discussions with employees and customers who had been affected by high-profile shootings. Notably, however, gun manufacturers were not cut off from the entire financial system. Bank of America only closed some accounts while it maintained accounts with others (e.g., Remington and Vista Outdoor Inc). Furthermore, although Sturm Ruger & Company had lost its account with Bank of America, it later moved to Wells Fargo.
A similar case occurred in 2019 when JPMorgan announced it would no longer finance private prisons and detention centers. Again, this decision appears to have been primarily a response to customers and other members of the public who protested at shareholder meetings and JPMorgan CEO Jamie Dimon’s apartment. And again, the private prisons were not cut off all at once. Instead, JPMorgan reduced its credit exposure over time.
With that said, most cases of operational debanking are unlikely to make headlines. A less controversial (though likely more common) example occurs when a financial institution closes an account after repeated overdrafts or late payments. Put simply, the account holder didn’t pay for the service, so the institution stopped offering the service.
In short, operational debanking centers on business decisions made within each financial institution.
Governmental Debanking
Governmental debanking is what occurs when a financial institution is pressured by the government to close the account of a customer. Governmental debanking can occur in two forms. The first form occurs when the government explicitly instructs a financial institution to close an account. This instruction can be as casual as a letter or as formal as a court order. The second form of governmental debanking, however, is more abstract. It involves the use of laws and regulations to make it increasingly harder to serve customers.
Again, let’s consider a few examples.
The case of National Rifle Association (NRA) v. Vullo made headlines in 2018 after then-superintendent of the New York State Department of Financial Services, Maria T. Vullo, issued regulatory guidance instructing financial institutions to review relationships with the NRA and “take prompt actions” to manage the risks. Vullo then joined New York Governor Andrew Cuomo to say that the government “urges all insurance companies and banks … to join the companies that have already discontinued their arrangements with the NRA.”
In another example, the Federal Deposit Insurance Corporation sent private letters to instruct financial institutions to stop conducting cryptocurrency-related activity. Although some people may take comfort in that the agency only told these institutions to “pause all crypto asset-related activity,” financial institutions know all too well that government suggestions are rarely optional. Furthermore, the agency failed to provide a timeline or follow-up. So, in practice, these letters were effectively termination orders.
Further back, another example occurred where companies sending money between the United States and Somalia quickly found themselves debanked in 2015 after “a broad U.S. crackdown on money laundering.” At the time, the Office of the Comptroller of the Currency ordered Merchant Bank to shut down these companies’ accounts unless it could “maintain sufficient transparency to reasonably ensure the legitimacy of the sources and uses of customer funds.”
Unfortunately for the companies, the cost-benefit analysis was not in their favor. The government made it so costly to serve these customers that the bank had to shut down their accounts.
Finally, in one more example, financial institutions will often close an account after a customer incurs too many suspicious activity reports (SARs). The concept may raise eyebrows, but one of the most common reasons for filing a SAR is that a customer made a transaction close to $10,000. As the Bank Policy Institute recently explained, “When a bank files a structuring SAR on a customer, that customer generally becomes designated as “high risk” under banking agency guidance, and agency examiners begin asking the bank why the account remains at the bank.” JPMorgan CEO Jamie Dimon also recently made this point saying financial institutions can face hundreds of millions of dollars in fines if it later turns out someone was breaking the law and the accounts were not shut down. In other words, the government has created a system in which all the incentives push banks toward closing the account.
Taken together, these examples show that governmental debanking occurs when the government orders or otherwise forces financial institutions to close accounts.
Conclusion
Distinguishing between these two forms of debanking matters greatly. It is the difference between losing access to one bank versus losing access to every bank.
With that said, these distinctions are not perfect. The examples with Bank of America and National Rifle Association v. Vullo show that operational and governmental debanking can overlap. If nothing else, the confidentiality associated with the Bank Secrecy Act and supervisory reports makes it nearly impossible to confirm there is zero government involvement in operational debanking. Likewise, it is also nearly impossible to confirm there were no bank employees relieved that the government forced them to part with a customer they were not particularly fond of in cases of governmental debanking.
Despite this complexity, the distinction still matters. Stopping governmental debanking requires rolling back sweeping regulations and excessive government discretion. Stopping operational debanking, however, would mean imposing new restrictions on private businesses—creating further market distortions.
Congress should resist the temptation to impose new market distortions in response to operational debanking. Instead, Congress should focus on reining in the laws and regulations that have fueled governmental debanking.
Are you interested in learning more about debanking? Check out my recent working paper that explains the approach taken in the Fair Access to Banking Act. You can find that paper here.