Today’s highly charged and extremely partisan political environment continues to create additional reputational risk for banks, with activists on both sides of the political spectrum seeking to involve the industry in supporting their particular issues or agenda. This is proving uncomfortable for many banks that, historically and for obvious reasons, have tried to remain neutral on political issues that do not impact directly the industry or the bank, itself. As the middle road has shrunk, and in some cases disappeared entirely, the impact of politics on a bank’s reputation has expanded to include not only how a bank does business, but increasingly with whom.
Determining whether or not to do business with certain kinds of businesses or business sectors is not a new issue for most banks. Traditionally, these decisions have been based on an assessment of the inherent risk in those types of businesses, primarily regulatory and credit risk. And, while other risk factors may have been considered, most often politics was not the primary determinant of whether or not to allow these types of companies to establish banking relationships. There are clearly some exceptions. For example, there are certain types of legal businesses that carry a level of social stigma or enhanced regulatory scrutiny with which some banks are uncomfortable. Individual banks have been free to make these assessments and decisions within their established risk management guidelines and tolerances. In most cases, these businesses have not been shut out of the banking system but have found willing providers. After all, one bank’s risk is another bank’s opportunity.
However, the emerging political reality is now forcing banks to consider a whole new set of factors regarding industries and business sectors that previously had not carried significant reputational exposure. Historically, few people have known, or even cared, if a particular bank was doing business with a specific company or financing a specific project. This has changed — and changed dramatically.
Over the last couple of years, we have seen numerous examples of banks that have suffered consequences or made decisions based on partisan political issues. A number of banks have made difficult decisions regarding their relationships with gun manufacturers, dealers and the National Rifle Association; Wells lost some business because of its financing of the Dakota Access Pipeline; JPMorgan Chase decided to discontinue doing business with private prison companies; and North Carolina banks had to deal with the implications of that state’s “bathroom law.” These are just a few examples and, we believe, are only the tip of the iceberg. Issues such as guns, climate change, sexual orientation, gender equality and identity, health care, prescription drugs, the legalization of marijuana and many others will take on increasingly partisan political perspectives and create both challenges and choices for individual banks.
One choice that some banks are making is whether to avoid certain political issues or embrace them. An emerging example is climate change. While some banks are promoting their support for sustainable energy solutions, a new nonbank entrant, Aspiration, is taking the issue to a whole new level and positioning itself directly to millennials by attempting to differentiate itself from large banks that it claims are doing everything imaginable to destroy the planet. We expect to see the emergence of additional market participants that design programs and brands targeted to market niches that hold a particular political point of view. Remember, one bank’s risk is another’s opportunity. However, this is not a choice available to most traditional banks that must serve a broad and politically diverse customer base.
As political rhetoric and activism increase across a wide spectrum of issues, there is a real danger that banks will lose control of their own risk management decisions. Is this fair or helpful? Probably not, but it is the emerging reality. Consequently, banks must act now to integrate political considerations into their overall risk assessment and management systems and processes in ways that help management anticipate and address potential reputational risk. This not only requires new risk management approaches, but, importantly, new skill sets.
Most banks have spent considerable time and resources to build the processes, technology infrastructure and expertise to manage traditional forms of risk — credit, balance sheet, operational, information security, compliance and the like. Unfortunately, existing risk management systems and processes are not built to identify and mitigate this new type of politically driven reputational risk. The issues do not lend themselves to technology solutions, and only the largest banks have either internal or external resources dedicated solely to monitoring and understanding political trends and issues.
Yet this does not mean that community and midsize banks can and should do nothing. The keys to dealing with this new political reality are to be proactive, consistent and adaptable — perform regular political risk assessments, analyze the potential impact of specific political issues on customers, develop clear guidelines to drive consistent decisions on issues that might have a political implication and create rapid response processes to adapt quickly when something new comes up or things don’t go as planned.
The impact of political activity on the banking industry is not new. After all, banking is a highly regulated industry, subject to laws and regulations often promulgated by political entities. However, the scope and nature of political activity has changed fundamentally. Partisan lines are no longer being drawn with a pencil, but with a chisel. It is no longer sufficient to try to manage reputational risk by controlling what a bank does and how they do it. They must expand the scope of their risk assessments and responses to include a thorough understanding of how a weaponized political environment will impact their decisions on the individual customers and types of business they serve.
