A recent executive order on debanking in the US carries several risks for the industry, such as potential fines and threats to banks' independence.
President Donald Trump's recent executive order related to debanking directed regulators to take a look at banks' past behavior to identify discrimination based on religious or political leanings and remediate those institutions through consent orders, fines or referral to the Justice Department.
While harsh consequences like consent orders or DOJ referrals are unlikely, experts said the administration could seek to make an example of some banks by levying fines. But even if limited public actions are brought against banks, the government's involvement in banks' business decisions holds broader implications for the industry and threatens safety and soundness, industry experts said. Nonetheless, lawyers advise banks to take proactive steps to review their policies.
"I don't see enforcement actions and criminal actions," John Gorman, a partner at Luse Gorman PC who represents financial institutions on M&A, regulation and other topics, said in an interview. "A fine would be the exception. Now you can see them wanting to make an example out of someone or something, if they can."
Ian Katz, managing director at Capital Alpha Partners LLC, agreed there could be fines. "But I wouldn't expect it to be huge," Katz wrote in an email.
Gorman said the agencies may also not issue any fines or consent orders, just as the strongly worded executive order could be enough to change banks' behavior.
Banks must take steps to prepare for compliance with the regulators' new outlook on debanking. These steps include reviewing their current policies that mention reputational risk, conducting internal audits of past account closures to identify any potential issues before their next exam, and updating staff training to follow new regulatory expectations, partners at Sidley Austin LLP wrote in an Aug. 8 blog post.
When identifying closed accounts, banks should try to peg the reason to other regulatory requirements such Bank Secrecy Act/anti-money laundering policies, identity theft protection or fraud risk management, the Sidley Austin partners wrote.
While all banks are confronted with "heightened pressure to justify past account decisions," community banks in particular "may face increased burdens in reconstructing historical customer interactions, adapting onboarding and offboarding processes, and managing reinstatement logistics," Holland & Knight senior policy adviser Yasmin Nelson and partner Eamonn Moran wrote in an Aug. 13 post.
"The upcoming reviews, enforcement actions and legislative developments will shape the contours of banking regulation in the months ahead," they wrote.
Enforcement actions are more likely for banks that fail to follow rules in the future, rather than for their past behavior in response to former regulators.
"Never say never, but I think that there is a view that there was a set of rules, and if they were following them, that if you change the rules, you need to have fair warning, so my expectation is that there will not be aggressive enforcement action on banks who follow the rules that were established by previous regulators," Ed Mills, a managing director and Washington policy analyst at Raymond James & Associates, said in an interview.
"Now, if they don't follow the rules that are implemented after this, that's when they may see themselves in trouble."
Government encroachment
There is growing concern about the government's involvement in banks' business decisions, regardless of whether consequences are handed down.
"Banks should be equally wary when the government tells them who they cannot serve and who they must serve," said Matthew Bornfreund, a partner advising banks and fintech companies on regulation and more at Morrison & Foerster LLP and former attorney at the Federal Reserve Board.
Experts said there are risks associated with pressuring banks to service everyone.
"Ultimately, if banks don't have the decision anymore, you are effectively kind of causing them to almost look a lot like public utilities," Jeffrey Taft, a partner and co-leader of the financial services practice at law firm Mayer Brown, said in an interview.
Specifically, there is concern that the removal of reputational risk from regulatory considerations and the push for banks to work with potentially risky customers will harm the safety and soundness of the industry.
The executive order has "competing tensions" with Bank Secrecy Act/anti-money laundering policies and safety and soundness, Holland & Knight's Nelson and Moran wrote.
"Though it aims to secure equal access to financial services, the order simultaneously challenges institutions to balance newfound inclusivity mandates with existing compliance responsibilities," they wrote.
Being pressured to serve riskier industries could cost banks, which would bear the brunt of potential losses, not the government.
"If banks were compelled to service higher-risk clients, there isn't some mandated way for them to recoup those costs," Matthew Bisanz, a bank regulatory partner at Mayer Brown, said in an interview.
Conversely, others argued that the government can have some say in banks' business, given that it hands out charters, regulates the industry and provides a financial backstop through deposit insurance. This is not the case for most other businesses that operate independently.
A bank has "a charter from the government. Most businesses don't require a charter from the government," Gorman said.
Which banks are at greater risk?
Under the last administration, some banks likely distanced themselves from industries such as cryptocurrency or right-leaning customers and industries in the wake of Jan. 6, 2021, riots, Katz wrote in an Aug. 11 note.
"Banks, perhaps feeling pressure from Biden-era regulators, may have overstepped their bounds in some instances," Katz wrote.
As the regulators conduct their lookback, experts said that banks most at risk of potential consequences include those in specific niches, focusing on serving specific industries and perhaps those that have been vocal about environmental, social and governance issues.
"Any bank that has decided to focus on a particular niche within the marketplace is at risk of being told that their focus on one particular aspect of the market is somehow an impermissible political view," Bornfreund said.
Piper Sandler analyst Mark Fitzgibbon named Amalgamated Financial Corp. as an example of a bank at risk. It banks the Democratic Party and has been supportive of green energy over fossil fuels.
"We can't help but worry that Amalgamated could become a target (along with other banks)," the analyst wrote in an Aug. 5 report.
"While we believe that the fundamentals at [Amalgamated] are strong, we are concerned that the company could become ensnared in a more challenging regulatory process to defend their positions, which would be a distraction at best and could theoretically have other negative consequences."
