Trump talks debanking in Davos. What is it, and what role does government play?

President Donald J. Trump spoke to the World Economic Forum in Davos, Switzerland, on Jan. 23, where he called on banks and financial institutions to stop the practice of “debanking.” This is when a person or company loses access to banking services (e.g., checking accounts, access to capital) due to financial, legal, or regulatory risk. To Bank of America CEO Brian Moynihan, Trump said, “You’ve done a fantastic job, but I hope you start opening your bank to conservatives.” 

In modern discourse, debanking is often discussed in terms of losing access due to political ideology. This was fueled, in part, by venture capitalist Marc Andreessen’s recent appearance on The Joe Rogan Experience. Andreessen said he knows of “over 30 tech founders debanked in the last four years,” laying blame primarily on the federal government. Andreessen made these comments in connection to cryptocurrency tech founders losing access to banking services due to the nature of their business. There is well-documented evidence to support his view that government is the instigator, going back to President Barack Obama’s Department of Justice (DOJ) and “Operation Choke Point,” which ultimately forced banks to terminate relationships with lawful, legitimate businesses and led to serious distrust of the DOJ among conservatives.

Federal attempts to regulate debanking include the Fair Access to Financial Services Rule proposed by the Office of the Comptroller of the Currency (OCC). Though this rule was never formally implemented, the OCC maintains that its “long-standing supervisory guidance stating that banks should avoid termination of broad categories of customers without assessing individual customer risk” will remain in effect. However, due to recent concerns, states like Florida and Tennessee have enacted their own fair access laws. This gives the banking industry pause due to concerns around misaligned or contradictory regulations between states (or even between ideologies). 

Of course, banks are primarily interested in making money and would prefer to bank with as many people as possible. In practice, loss of access to banking typically occurs when banks have reason to believe individuals or businesses are engaged in illegal activity. Not cracking down on these accounts can cause regulatory issues, leading to fines and other punitive measures. Federal privacy laws preclude banks from disclosing this information, making it difficult for them to defend themselves in the public square. Given concern among business leaders, individuals, and legislators, the most suitable path forward is likely through federal legislation. This could help Americans feel confident that they would not lose access to their accounts, and banks could follow a simpler regulatory approach resulting in far less red tape and a smaller bureaucratic burden.

However, the loophole that allowed Operation Choke Point to engage in debanking included the vague regulatory term “reputational risk.” To fully address the issue would require regulatory reform that limits regulators’ ability to close accounts based simply on this obscure standard. Any federal legislation to address debanking should likewise address the regulation that led to it.

Bank executives were likely expecting federal action on the debanking front, with JPMorgan Chase CEO Jamie Dimon discussing the need for reform on a recent episode of the company’s in-house podcast. Senate Banking Chairman Tim Scott (R-S.C.) has indicated his intentions to hold a hearing on the subject. Last Congress, Sen. Kevin Cramer (R-N.D.) submitted legislation titled “Fair Access to Banking,” which would deny financial institutions who participated in debanking the ability to borrow from the Federal Reserve, among other penalties. Rep. Andy Barr (R-Ky.) submitted companion legislation in the House. While there likely are some points of agreement between legislators and financial institutions, concerns still exist—for example, banks may worry about legislation that could force them to do business with individuals or businesses they deem too risky. There are also challenges surrounding the implementation of these laws alongside privacy laws. Nonetheless, federal legislation is likely the best means to alleviate the concerns of Americans and lawmakers while satisfying banks’ concerns regarding burdensome regulation.