Choke Point epilogue: Are banks free to refuse service?

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WASHINGTON — The battle lines drawn over federal efforts to restrict bank relationships with politically risky industries used to be clear cut. Not anymore.

For years, financial institutions and many Republican critics railed against Operation Choke Point. The Department of Justice initiative under the Obama administration pressed banks to block illegal transactions from merchants such as payday lenders, but those lenders argued the government had no right to force institutions to cut off access to legal businesses.

Yet now many Republican lawmakers, angry that some large institutions have voluntarily severed relationships with gun and private prison businesses, are coming at the issue from a different angle, pushing a bill that would prevent banks from cutting off access to certain types of firms.

Add in the mixed messages on whether banks should be allowed to serve marijuana-related firms, and a new question is taking shape: If it's wrong to force banks to drop ties with certain sectors, can the government also force them to keep those ties?

"If a bank is pulling back from dealing with firearms or private prisons, it’s because the bank has made a business decision that the gains from that book of business are outweighed by the reputational hit that might scare away other customers," said Adam Levitin, a Georgetown University law professor. "It’s curious to see GOP senators who think of themselves as proponents of the free market telling banks that they can’t respond to market demand."

In some cases, lawmakers are on both sides of the issue simultaneously. That is particularly true when it comes to marijuana businesses.

Even though roughly 30 states have legalized the substance, some who oppose banks dropping relationships with legal businesses argue that the federal ban on marijuana gives them pause.

“Firearms are legal,” Sen. Mike Rounds, R-S.D., said in an interview last week. “Marijuana, the sale of marijuana today, according to federal law, is not. So there is a difference there and that’s the reason why I hesitate to compare the two.”

In the wake of mass shootings last year, large banks including Bank of America, Citigroup and JPMorgan Chase announced steps to pull back business to clients in the firearms industry. More recently, JPMorgan and Wells Fargo took steps to reduce business to private prisons following criticism by Democrats that some firms had housed migrant detainees at the border.

But those decisions sparked strong Republican pushback. Senate Banking Committee Chairman Mike Crapo, R-Idaho, recently urged large bank CEOs to continue serving "politically disfavored" industries. And Sens. Kevin Cramer, R-N.D., and John Kennedy, R-La., introduced a bill last month to prevent financial institutions from cutting off legal firearms businesses.

"Big banks should not be the arbiters of constitutionality,” Cramer said when the bill was introduced.

In an interview, Rep. Patrick McHenry, R-N.C., the ranking member of the House Financial Services Committee, argued that banks should not be in the business of "social engineering."

"They should not discriminate against people based off of non-credit-determinative factors," McHenry said.

Some argue that the decisions by banks regarding firearms and prison businesses were not entirely their own, but rather were prompted by pressure from Democratic lawmakers such as the outspoken first-term congresswoman Rep. Alexandria Ocasio-Cortez. The New York lawmaker had criticized banks that made loans to private prisons.

Ocasio-Cortez "may not be able to get the votes to outlaw private prisons, but if she was wildly successful in getting the banks not to do business with private prisons, she can basically de facto do the same thing,” said Brian Knight, director of the program on financial regulation and senior research fellow at the Mercatus Center at George Mason University.

But others argued that forcing banks to serve a business sector without allowing them to make internal risk judgments is also not the right approach.

"Any legislation that tries to force banks into making certain types of risk decisions is probably not productive,” said Rolland Johannsen, senior consulting associate with Capital Performance Group LLC. “Whether it’s forcing banks to make decisions regarding reputational risk … or telling them that they have to make certain types of loans that carry an inordinate amount of risk, having government determine how banks should manage risk is to me not a good policy.”

Levitin pointed out that appropriate restrictions on businesses from discriminating against customers are typically related to civil rights, but he said those restrictions do not apply here.

"Banks should be able to decline to serve any customer for any reason they want other than membership in a protected class— that is, a bank shouldn’t be able to discriminate on the basis of race, religion, gender, national origin, sexual orientation, disability, etc.," he said.

Knight said the role of banks in highly charged national debates will likely continue to grab attention since access to banking plays such an important part in the economy.

“The politicization of financial services and financial services regulation has the potential to be a very significant and ongoing controversy,” Knight said. “Financial services are essential to meaningful access to our economy.”

Marijuana banking complicates the debate even further over banks' legal risk.

Some who argue the government wrongfully pressured banks to cut ties with payday lenders in Operation Choke Point, and that banks should serve the firearms industry, do not have the same view when it comes to banks catering to the cannabis industry.

For them, the issue comes down to legality: Despite states legalizing the substance, it is still banned at the federal level.

The House is close to passing a measure that would enable banks to serve marijuana businesses in states where the substance is legal. The House Financial Services Committee advanced the bill last week with a 45-15 vote, which included 11 Republican supporters. Lawmakers in both the House and Senate have reintroduced a separate bill to exempt businesses in states that have legal cannabis laws from the federal ban.

When the latter bill was released Thursday, Cramer's office told reporters that he supports it. Yet Crapo has largely avoided taking a position on the issue.

“I haven’t made any decisions on that. One of the issues that we have is that at a federal level cannabis is still illegal," he said in an interview. "So the Department of Justice really has an evaluation to do, which would help us resolve the issue. But in terms of when we address it, I haven’t made any decisions on that.”

Thomas Wade, director of financial services policy at the American Action Forum, said he sees some similarities between the marijuana banking question and Operation Choke Point, but only to a point.

"There are certainly parallels between Operation Choke Point and the restriction of banking services to cannabis businesses," Wade said in an email. "Where the analogy breaks down slightly is that in the case of Operation Choke Point the Department of Justice is alleged to have pressured financial actors to withhold access to capital from businesses without first demonstrating that those businesses were engaged in any illegal activity.

"For marijuana businesses the legal position is far less clear. Banks and other sources of funding are understandably concerned about their legal and reputational risks in lending to businesses whose activities deal with a substance prohibited by federal law."

But Knight said that lawmakers who don't question marijuana legalization efforts should support enabling banks to serve businesses associated with the industry.

“If you look at a marijuana business and say that it should remain illegal, then there is not hypocrisy," Knight said. "But if you are OK with that business being legal, being able to access the banking system should also come with that.”

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Risk management Policymaking Finance, investment and tax-related legislation Mike Crapo House Financial Services Committee Senate Banking Committee Wells Fargo