Make access to banking fair

OPINION:

Over the past several months, it has become ever clearer that under past administrations, politically directed bureaucrats compromised — even choked off — fair access to our banking system under the pretense of managing banks’ “reputation risk.”

The Trump administration is leading the way to make sure it doesn’t happen again, but in our zeal to address past overreach, we must be careful not to overshoot the solution.

Having begun my career as a banker, co-founded a community bank and served as ranking member on the Senate Banking Committee, I know firsthand how “reputation risk” regulatory guidance is too vague, subjective and prone to being politically weaponized.

Banking regulators have enormous powers over the banks they supervise — too much. A bad score from an examiner can trigger enforcement actions, raise capital costs, restrict growth and damage a bank’s relationship with counterparties and customers. As President Trump said himself earlier this year, “The regulators control the banks. … The president of the bank is far less important to a bank than a regulator, and a regulator can put that bank out of business.”

That’s why it is vital that regulators evaluate objective, quantifiable banking metrics such as capital adequacy, asset quality and liquidity rather than subjective measures, such as “reputation risk,” which is prone to abuse. We learned this lesson the hard way during the Obama and Biden administrations.

The Obama administration sought to curb activities in the firearms, small-dollar lending and fossil fuels industries. Through Operation Choke Point 1.0, they wrongly instructed financial regulators to pressure banks to “debank” those disfavored industries. The Biden administration focused its unlawful discrimination against the cryptocurrency sector with Operation Choke Point 2.0.

Fortunately, the Trump administration is putting an end to this regulatory overreach. Mr. Trump issued an executive order that, among other reforms, forbids bank regulators from considering “reputation risk” as part of their examinations and directs the Treasury to ensure fair access to banking. Although the executive order is a very constructive step, like any other executive order, it lacks the durability of legislation, which is why Congress needs to act.

Senate Banking Committee Chairman Tim Scott, South Carolina Republican, introduced the Financial Integrity and Regulation Management Act, which explicitly removes “reputation risk” from the banking supervisory process. Notably, Mr. Scott’s bill does not make the mistake that several state legislatures are flirting with. The bill does not forbid banks themselves from protecting their own reputations by managing their books of business. He does not mandate that banks must do business with anyone, which would effectively make banks a public utility.

Forbidding banks from managing their reputations would risk undermining the trust, flexibility and innovation that have helped make our financial system the envy of the world.

Every responsible business must consider reputation — its own and others’. Customers, investors, employees and prospective employees all care about the reputations of companies with which they do business. Managing “reputation risk” may be even more important for banks than most other businesses. People entrust their savings to institutions only if they have complete confidence in the integrity and competence of those institutions. That confidence depends entirely on banks’ reputations, and no one knows this better than bankers.

Sometimes managing “reputation risk” requires banks to turn down business. Imagine a group of conservative Christian founders of a bank in Nevada. Prostitution is legal there, but these bankers might well prefer not to finance a brothel, and they shouldn’t be forced to.

This is an important free market principle to defend: Banks, like other businesses, must be able to make independent business decisions, including decisions about with whom they do business. Importantly, consumers also have the power to choose with whom they bank, from nearly 5,000 institutions, each with their own unique value propositions. Guaranteeing fair access to financial services, as the president aims to do, is in our banking system’s DNA and something we should fiercely protect.

Recent “debanking” reports from the Office of the Comptroller of the Currency and the House Financial Services Committee underscore the momentum in the administration and Congress to ensure fair access to banking. As policymakers consider next steps, they must ensure that reforms strike the right balance: ending politically motivated, government-driven debanking while preserving banks’ ability to manage their own reputation risk responsibly.

Only then can we maintain a dynamic, innovative banking system that continues to serve American consumers and communities for generations to come.

• Pat Toomey served as a U.S. senator from Pennsylvania from 2011 to 2023. He is an adviser to Americans for Free Markets.