The Trump Administration recently accused one of the nation’s largest financial institutions, Wells Fargo, of “discriminating against home buyers by creating programs that favored minority applicants for loans.” This isn’t the first time the administration has accused a bank of playing politics with its business practices. The President has largely focused on whether these institutions discriminate against conservatives by closing certain customers’ accounts, including his own, and denying future access to financial services, a process called debanking.
What is debanking?
When a financial institution perceives an account holder, whether an individual or a business, to “pose a financial, legal, regulatory, or reputational risk to the bank,” it may choose to close the account, sometimes without notice or explanation. This may mean that any money currently in the account is frozen, with no way for the account holder to gain access. Additionally, by terminating or refusing to provide loans, credit or payment processing services to customers, these banks have a lot of power in establishing who has access to the modern-day economy, which is increasingly cashless.
Debanking happens all over the world, and banks often reason that debanking is necessary to follow local laws by ensuring they are not unwittingly assisting in corruption, money-laundering, or terroism plots. However, critics of debanking argue that legitimate reasons are being increasingly used as an excuse for closing the accounts of individuals for political or moral reasons the bank may object to.
For example, after 9/11, regulations were established to prevent future terrorists from moving money around. This has resulted in Muslims worldwide being locked out of basic banking services despite no connection to any terrorist organization. This has prompted many policymakers to get involved to ensure banks can “address genuine risks without discriminating against customers based on their lawful views.”
The Fed gets involved
The current administration has taken a particularly strong interest in debanking since taking over last year. Last August, the President signed an Executive Order calling out politicized and unlawful debanking and instructing various federal agencies to ensure it wasn’t happening. Then, in February this year, the Federal Reserve published a proposed policy to roll back debanking regulations, which received over 12,000 public comments – considerably more than the average number of comments for its policy proposals, which normally receive a few dozen.
An analysis of the comments, by Bloomberg reporters, found that the vast majority supported the proposal, with only a few dozen clearly opposed. Among the reasons for support included artists and creators who had “struggled to make rent or buy food after financial firms rejected them directly or threatened the online marketplaces where they sell goods,” members of LGBTQ and religious communities who feared a crackdown on their culture, and even gun lovers who worried it would restrict their ability to purchase firearms.
One of the commenters shared with Bloomberg that they decided to submit a comment because debanking felt like another avenue to shape morality in the country, as the term “reputation risk” is “so vague that it can be used for whatever is politically [or] financially convenient.”
An effective political tool
While the current administration’s initial motives were most likely personal, other administrations have also pressured banks to cut ties with certain industries that coincide with their political agenda. In 2013, the Obama administration started Operation Choke Point to encourage banks to cut financial services to fraud- and money laundering-prone industries such as firearm, tobacco, and payday lenders. Similarly, the Biden administration has been accused of focusing its efforts on debanking the cryptocurrency industry.
Even though the Trump administration has taken a public stance against the practice of debanking, it’s also been accused of telling banks to eject customers who show signs of working with “antifa” and using it as an anti-immigration tool. Debanking has real repercussions for innocent individuals who get swept up in the political back and forth and get locked out of their accounts or financial services altogether. As noted by the National Immigration Law Center, there is no law in the U.S. that prevents immigrants of any status from opening bank accounts and “access to safe and affordable banking services is an important part of economic stability. Bank accounts allow people and families to receive wages, pay bills, and build credit.”
