US Regulator Wants To Stop Banks From Blacklisting Legal Businesses, Crypto Included

New rule-making aims to stop “creeping politicization of the banking industry,” says OCC head. US Regulator Wants To Stop Banks From Blacklisting Legal Businesses, Crypto Included

Per an announcement on Friday, the Office of the Comptroller of the Currency, or OCC, is looking for public comments on rule-making that would stop banks from denying services to businesses based on sector.

In the words of Comptroller Brian Brooks, “Blanket boycotts of entire industry sectors have to stop.”

The OCC’s announcement points to political hot-button issues that banks have systematically denied services to, including oil and gas companies in Alaska as well as Planned Parenthood.

Speaking to the media, Brooks noted the bipartisan nature of many of these bans: “These things are not politically partisan, but there are all kinds of attempts that we’ve seen to politically weaponize the banking system.” He continued: “There is a creeping politicization of the banking industry that has the potential to be very dangerous.”

Brooks Told Cointelegraph:

“There is no place within the United States where crypto is illegal, but there are different licensing requirements for companies involved with businesses so obviously if a bank was banking one of those businesses, one of the things that bank would look at as part of its diligence is whether that exchange or other business had the relevant approvals in that state.”

Which is to say, banks would not be able to disqualify potential crypto clients on the basis of their industry. A combination of uncertain regulation and reputational risk has led banks to cut off services to crypto businesses all over the world.

Brooks, who formerly ran Coinbase’s legal team and took the helm at the OCC in May, has spearheaded a number of initiatives to reconcile crypto with the banking industry. Indeed, several members of the House Financial Services Committee saw fit to criticize Brooks for his focus on crypto during the pandemic.

Given the prominent role of oil and gas businesses in today’s proposed rule-making, Brooks may well take additional heat from the same characters.

The proposed rule-making is available under docket number OCC-2020-0042. The OCC invites commentary through Jan. 4.

Banks Can’t Deny Services To Entire Industries Under OCC Proposal

OCC proposal follows complaints from oil-and-gas industry.

Big U.S. banks can’t refuse to lend to entire categories of lawful businesses under a rule proposed Friday, following complaints that the oil-and-gas industry was unfairly denied financing by large lenders.

The Office of the Comptroller of the Currency said its proposal is aimed at ensuring “fair access” to banking services for all types of legal but politically controversial businesses, not just fossil-fuel companies.

It covers a range of businesses the regulator said have been denied service for apparently partisan reasons, such as family-planning centers, firearms manufacturers and privately managed prisons.

“We need to stop the weaponization of banking as a political tool,” Brian Brooks, the acting comptroller, said in an interview this week. “It’s creating real economic dislocations.”

Friday’s proposal will be subject to public comment until Jan. 4 before it can receive final approval, leaving a narrow window for Mr. Brooks to complete the measure before President Trump leaves office on Jan. 20. Though Mr. Brooks can remain in his job after President-elect Joe Biden’s inauguration, the incoming administration could move swiftly to replace him.

The measure, which Mr. Brooks said largely codifies existing guidance, is certain to draw pushback from the banking industry over concerns it could create an obligation to lend unless a bank can demonstrate there is credit risk. The Financial Services Forum, which represents the biggest U.S. banks, and the Bank Policy Institute, another industry group, declined to comment.

Five of the six largest U.S. banks— Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co.—have pledged over the past year to end funding for new drilling and exploration projects in the Arctic.

Alaska Sen. Dan Sullivan and a group of fellow Republican lawmakers, mostly from energy-producing states, have been lobbying the Trump administration to examine whether the federal government can prevent the banks from cutting off financing or punish them for doing so.

“These banks that get huge federal government support…cannot collude together to essentially blackball entire sectors of the U.S. economy,” Mr. Sullivan said in an interview ahead of the proposal.

Democrats criticized the proposal, saying it rested on a questionable legal foundation and isn’t likely to be effective.

“Lenders are realizing that a lot of these projects just aren’t financially viable, and no amount of government coercion is going to change that,” said Graham Steele, a former Democratic Senate staffer who is now director of the Corporations and Society Initiative at Stanford University’s Graduate School of Business.

Under the proposal, banks could still deny services to individual customers but would have to justify their decision by showing the person or business failed to meet “quantitative, impartial risk-based standards established by the bank in advance,” according to the proposal.

Wall Street has been pulling back from the oil-and-gas industry after years of poor returns from it and is under increasing pressure from environmentalists and others to limit fossil-fuel lending.

While broader market conditions during the coronavirus pandemic this year have dried up capital for new exploration, some analysts have said a lack of bank financing could deter drilling in the Arctic National Wildlife Refuge, which the administration opened to exploration in August.

Updated: 12-07-2020

We Don’t Need The OCC’s ‘Political Discrimination’ Rule

Big U.S. banks have long refused to lend to coal miners that use a mountaintop removal technique. Wells Fargo says it prohibits such lending because it recognizes the “elevated community concerns associated with the practice.”

Should banks like Wells Fargo be allowed to stop lending to an industry because of its impact on the environment or its lack of commitment to social justice? Doesn’t Wells Fargo have an obligation to be neutral?

J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and was a financial writer at a large Canadian bank. He runs the popular Moneyness blog.

This is the issue at the heart of a recent rule change proposed by Brian Brooks, acting head of the Office of the Comptroller of the Currency, or OCC, a key U.S. bank regulator. Brooks and OCC Chief Economist Charles Calamoris want to stop banks from “politically driven discrimination.”

Their rule would prevent bankers from using anything other than regular credit and operational criteria for evaluating a company seeking financial services.

The upshot? Wells Fargo would have to re-bank coal miners that practice mountaintop removal. Banks would also be required to restart lending to oil companies involved in exploring Alaska’s North Slope, a practice the likes of Wells Fargo, Citigroup and JPMorgan Chase have all promised to avoid. Nor would they be allowed to cave in to activists who call for account closures of groups they don’t like, say, like Planned Parenthood.

I disagree with the OCC’s proposed rule. The underlying motivations are good ones, especially in context of Operation Choke Point (see below). But I don’t think the U.S. needs it. It’s ironic that, in trying to depoliticize the banking system, the OCC is likely precluding greater diversity in service providers.

Operation Choke Point

Operation Choke Point was an Obama-era program that tried to sever unfavored industries from the banking system. In 2011 the Federal Deposit Insurance Corporation, or FDIC, a federal government body that supervises and examines U.S. banks, placed a number of perfectly legal business categories on its “high-risk” list.

One of these was payday lending, an industry that is often maligned for preying on a poor clientele. Internal FDIC emails voiced an intent to “get at payday lending” and to “find a way to stop our banks from facilitating payday lending.”

“We now have decentralized platforms where vilified but legal companies can go to secure financing.”

After several payday lenders sued the FDIC for violating their due process rights (the OCC’s Calomiris provided expert testimony), FDIC agreed to settle the dispute.

The regulator admitted that “certain employees acted in a manner inconsistent with FDIC policies” and issued a statement reiterating that carrying out its responsibilities rests on “laws and regulations, not on personal beliefs or political motivations.” And thus Operation Choke Point was shut down.

I think everyone can agree that Operation Choke Point was reprehensible. The core regulatory and central banking layers of the financial system stay must stay neutral. No matter what sorts of legal businesses banks choose as their customers, every bank should be granted equal access to the Federal Reserve’s core payments tools. Nor should FDIC officials be able to use its examination powers to favor businesses.

Fair Trade Bank Accounts

The problem with the OCC’s new fair access rule is that it has a huge blast radius. Yes, it would prevent future government-run choke points. But it would unnecessarily damage efforts by banks to shape their brands in ways that are designed to satisfy emerging consumer tastes.

The 21st century consumer wants to know more about the provenance of the things they buy. We don’t just want tuna, we want dolphin-friendly tuna. We don’t just want coffee, we want fair trade coffee. And we don’t want our T-shirts to be made in sweatshops with Xinjiang-grown cotton. We want ethical T-shirts.

This shift in consumer spending has migrated into finance. Think socially responsible indexes, green exchange-traded funds and activist investing. We see it in gold markets, too. The world’s main trading venue, the London Bullion Market, has set up a responsible supply chain that requires refiners to verify that miners safely use mercury and are not involved in human rights abuse.

In banking, loans are the fodder for creating safe deposits. So if a bank wants to attract modern consumers by setting up a clean supply chain (aka fair trade bank account) that means pruning source material for deposits, say coal miner loans.

But the OCC’s rule would block the entrance of this new consumerism into banking.

Is Banking Special?

The argument against allowing fair trade bank accounts is that “banking is special.” Brooks and Calomiris argue that government chartering and direct access to the Federal Reserve obligate banks to provide services to all companies. And so America must do without the banking versions of dolphin-safe tuna and organic milk.

But this downplays the competitiveness of the U.S. banking system.

If Wells Fargo chooses to avoid making a profitable loan to an Alaskan oil explorer because it wants to greenify its deposits, then Bank of America, Regions Financial or any other bank that isn’t quite so concerned will swoop in, make the loan and gobble up the forgone profits.

Nor are banks the only source of financing for firms. The U.S. has some of the deepest capital markets in the world. Our Alaskan explorer can issue commercial paper, junk bonds or equity. Or perhaps some enterprising intermediary, say a private equity firm, will find a way to break the Alaskan oil embargo by borrowing from Wells Fargo and lending the funds to the blacklisted entity.

Lastly, we don’t live in the same world we did five years ago. With the emergence of public blockchains like Ethereum, we now have decentralized platforms where vilified but legal companies can go to secure financing. Just create a token approved by the Securities and Exchange Commission and list it on a decentralized exchange. Voila, arctic oil drilling bought and paid for.

For those worried about accessibility, we don’t need the OCC’s new rule. To guard against future government-sponsored choke points, payday lenders have already demonstrated the best defense: the justice system. The OCC’s rule would only stifle the ability of banks to create new products for today’s discriminating customer. Surely, American finance is rich and diverse enough to handle fair trade bank accounts.

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US Regulator Wants To Stop Banks From Blacklisting Legal Businesses, Crypto Included

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