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Big, small banks have different ideas on how to fix pot banking

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More than five years after the introduction of the first marijuana banking bill, Congress finally held its first hearing on the issue Wednesday.

But as the work of hammering out legislative details gets underway, the interests of large banks may soon come into tension with those of small institutions.

The entire banking industry is generally on the same page about the need for legislation. The common goal is to give banks greater comfort about serving a sector that sells a product that is still illegal under federal law.

But lawmakers have introduced bills that take two distinct approaches to solving the problem. One has drawn the endorsement of the Independent Community Bankers of America, while the other seems more likely to attract support from bigger banks.


The Safe Banking Act was first introduced in 2013. It is expected to be reintroduced by its sponsor, Rep. Ed Perlmutter, D-Colo., by the end of February.

The most recent House version of this legislation would bar federal regulators from terminating deposit insurance as a result of a bank or credit union opening its doors to a state-legal cannabis business.

Likewise, it would prevent federal regulators from taking other adverse actions against such banks and credit unions.

The community banking trade group voiced its support for the measure at Wednesday’s hearing, which was held by the House consumer protection and financial institutions subcommittee.

Gregory Deckard, CEO of State Bank Northwest in Spokane, Wash., who spoke on behalf of the ICBA, noted that the cash-heavy cannabis industry remains a target for armed robbery. “The solution is an effective, statutory safe harbor such as that embodied in the Safe Banking Act,” Deckard said in his written testimony.

But Perlmutter’s bill looks like a better solution for community banks than it does for larger institutions. That’s because it covers depository institutions but doesn’t address the other various roles that big banks often play in the financial system.

The 2017 version of the Safe Banking Act did not offer any protection to broker-dealers, underwriters, asset managers or custodians that rely on nonbank entities, the law firm Davis Polk & Wardwell noted in a recent analysis.

That fact could help explain why the American Bankers Association, a trade group whose members include large banks, has given a somewhat more tepid appraisal of Perlmutter’s legislation.

“The Safe Banking Act is not a cure-all for the cannabis banking challenge, and many financial institutions will undoubtedly decide that the industry is still too high-risk for their bank. Nevertheless, the bill will give some added clarity and legal protection,” the ABA said in a statement that was sent to Congress in advance of Wednesday’s hearing.

Ironically, a legislative proposal sponsored by Democratic Sen. Elizabeth Warren of Massachusetts, the longtime nemesis of big banks, seems likely to offer greater protection to large institutions.

The States Act, which was co-sponsored last year by Sen. Cory Gardner, R-Colo., would tackle the cannabis banking problem by amending the Controlled Substances Act.

Specifically, the text of the Senate measure states that the federal law’s criminalization of marijuana would not apply to anyone acting in compliance with applicable state laws.

Davis Polk concluded in its analysis that the Warren bill would extend protections to financial institutions generally — rather than just in their role as depositories — since they would be recipients of proceeds from transactions that comply with state law.

The ICBA is neutral on the States Act, said Paul Merski, executive vice president of congressional relations and strategy at the community banking trade group. He explained that the group is not taking a position on changing the Controlled Substances Act.

As more states have legalized pot in recent years, big banks have taken a more cautious approach to the industry than some of their smaller counterparts. And it is unclear how much the passage of either the Safe Banking Act or the States Act would move the needle for larger, more complex institutions, as long as cannabis remains illegal under federal law.

“It provides the first step, but it’s not enough,” said Margaret Tahyar, a partner at Davis Polk.

Even congressional backers of pot banking legislation acknowledge that their proposals amount to half-measures.

Rep. Denny Heck, D-Wash., a co-sponsor of the Safe Banking Act, said that the sole motivation of the legislation’s backers is to improve public safety. He expressed uncertainty about whether the soon-to-be-reintroduced House bill will offer enough protection to persuade banks to make loans to cannabis firms.

“I’m not entirely sure what to predict in that regard,” he said Wednesday during a call with reporters.

After five-plus years, there is finally some movement on Capitol Hill, but forging a consensus on the best way to proceed will be no small task, either.

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