Every Halloween, commentators are tempted to describe routine events in the news with adjectives such as “scary” and “scary”. Sensitive to clichés or inflammatory, I generally try to avoid using such terminology in my descriptions of the political process.
Yet, around Halloween 2018, after reading new material introduced in a lawsuit stemming from the Obama administration’s “Operation Choke Point”, I found “scary” and “scary” to actually match. These documents show that powerful banking regulators have made an effort to intimidate and threaten to bankrupt legal industries they dislike by denying them access to the banking system.
Although I am often outraged by government actions, in October I was really scared and fearful of the ability of government bureaucrats to arbitrarily shut down entire classes of businesses that they deem “politically incorrect.” “. As a champion of the fintech industry and the benefits it can bring, I am also concerned that these powers may be used to shut down new innovative industries, such as cryptocurrency, which come with perceived or real risks.
Choke Point was a multi-agency operation in which several entities engaged in a campaign of threats and intimidation to get the banks they regulate to cut financial services – from granting credit to maintaining deposit accounts – to certain industries that the regulators considered harmful to the banks. “reputation management.” Newly published documents — introduced in two to research deposits in a lawsuit against Choke Point — to show that the genesis of Choke Point actually predates Barack Obama’s presidency and began when President George W. Bush was in power.
It was then, in 2008, that the Federal Deposit Insurance Corporation (FDIC) significantly broadened the definition of “reputational risk”. Prior to that date, the term referred to a bank’s own practices that resulted in negative publicity serious enough to harm the financial strength of the bank. This, of course, included a bank having a relationship with a customer or a third party that the bank knew was carrying out illegal activity.
But in June 2008, an FDIC “guidance document” on third parties performing functions on behalf of banks began to lengthen the term. According to this document, “any negative publicity involving the third party, whether or not it is related to the use by the institution of the third party, could lead to a reputational risk”.
When the Obama administration came to power, the FDIC would expand the definition of “reputational risk” even further and other federal agencies, offices and departments would soon jump on the proverbial bandwagon. Much of the point of Operation Choke would again be accomplished through “guidance documents,” which my Competitive Enterprise Institute colleague Wayne Crews calls “regulatory dark matter”, Since they have legal force but allow regulators to bypass the sunlight of the notice and comment process of a formal rule.
In 2011, an FDIC guidance document presented a table of categories of companies engaged in what it called a “high-risk activity”. These included “dating services”, “escort services”, “drug paraphernalia”, “Ponzi schemes”, “racist material”, “coin dealers”, ” gun sales ”and“ payday loans ”. The FDIC would publish this list and similar lists in other guidance documents and on its website.
A report from the staff of the House Government Reform and Oversight Committee puzzled many of these categories. “The FDIC has not provided any explanation or mandate for designating particular traders as ‘high risk’,” the report said. observed. In addition, there is no explanation for the implicit equation of legitimate activities such as coin dealers and gun sales with clearly illegal or offensive activities such as Ponzi schemes, racist material and drug paraphernalia. “
Intentionally or not, it was the legal companies that seemed to pay the price of being labeled “high risk” by banking regulators. In 2014, the Washington Times reported that a number of armories have seen their bank accounts frozen or abruptly terminated. A store owner received a note from his bank stating that “although this letter does not in any way reflect overriding reasons for such action on your behalf, [your] industry is not commensurate with the industries we work with.
But those who have been hit hardest by Choke Point have been the providers of low value loans, also known as “payday loans,” which have higher interest rates than conventional loans. Politicians and other critics have long denounced payday loans, arguing that they exploit the poor. But like my colleague from the CEI Daniel Press argued that “for cash-strapped consumers, small loans are often a better option than the alternatives available, such as overdrafting a bank account or defaulting on another loan”.
Whatever the merits of a product, until Congress acts, federal government agencies do not have the power to shut down payday lenders, gun stores, dating services, or anything else. industry by means such as their access to the banking system. Yet new documents included in court records paint a picture of regulatory agencies seemingly indifferent to the limits of their authority.
In 2013, according to court documents, the Justice Department shared with the FDIC the names of fifteen banks suspected of having relationships with payday lenders. With this new support from the country’s top law enforcement officials, the FDIC began to act more aggressively and began to demand even more forcefully that banks end their relationships with loan companies. on salary. In an email cited in court documents, an FDIC official told colleagues, “I think we’ve got our message across” after a bank ended its relationship with payday lenders shortly. long after a visit to the FDIC.
Banks across the country got the message and quickly stopped holding bank accounts and offering other services to payday lenders and small lenders. Advance America, the payday loan and cash advance company that is the main plaintiff in the lawsuit, has received termination notices from twenty-one banks. Its banking expenses soared 37%. In some cases, he had to hire an armored courier to store and transport his money. The costs of regulation are almost always passed on to consumers, who in this case are low-income borrowers.
In August 2017, following the diligent investigative work of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, chaired by Representative Blain Luetkemeyer (R-MO), the Trump Justice Department announcement that Operation Choke Point “is no longer in effect and will no longer be undertaken”. But to really make sure something like Choke Point doesn’t get picked up by future administrations or rogue regulators, the US Senate must follow the House and pass bipartisan HR 2706, the Financial Institution Customer Protection Act. This invoice, which was overwhelmingly passed at the end of 2017 by 395-2, says a financial regulator “cannot formally or informally request or order” a bank to end a relationship with a customer unless “the agency has a valid reason for such a request or an order, and that reason is not based solely on a reputational risk.
Some may unfortunately see it as a “candy” when the government uses extra-legal means to punish industries they are disadvantaging. But the “trick” can be on them when that precedent is reversed and used to pursue their allies. As a professor of law at George Mason University, Todd Zywicki Noted in the Washington Post, “Abortion clinics, for example, are missing from the FDIC results list. [and] radical environmental groups. To end a possible arms race of using bank regulators to tackle politically disadvantaged industries, Zywicki called for restricting “the extensive use of the vague and subjective standard of reputation risk.”
So let’s decide in 2019 – if not this month at the Lame Ducks Congress session – to permanently drive a stake into the frightening Operation Choke Point so that financial regulators never again lead ideological blood feuds through. the banking system.