You can't stop debanking without changing banking

Bloomberg News

Back in 2017 there was this get-together in Charlottesville, Virginia, that got rather out of hand. I am of course referring to the Unite the Right rally, in which hundreds of people with very retrograde views on race gathered in a show of strength and thousands of people who oppose those views gathered to protest. One person was killed and more than a dozen injured when a white nationalist plowed his car into a crowd of protesters, the most violent episode of a very violent weekend.

In the days that followed, questions began to emerge about how these white nationalist groups were able to organize — how are they funded, how do they communicate, and what banking and payments services do they use to further their ends? Visa, Mastercard and Paypal announced they would no longer service white nationalist groups, and many banks expressed willingness to terminate their banking relationships with avowedly racist organizations, though the difficulty is that many of those groups incorporate themselves with innocuous-sounding names or otherwise disguise their true intentions.

But there was little question then about whether banks were within their rights to terminate those relationships if they wanted to, even though having racist views and expressing them is not in itself illegal. A bank is a private company that provides services to clients voluntarily, and so long as they don't discriminate against protected classes, they are free to terminate those relationships at any time for any reason. Banking a neo-Nazi hate group might reasonably be construed as a liability for a bank, especially one that wants to draw on a broad-based pool of depositors. 

Fast forward to now. Marc Andreessen, co-founder of venture capital giant Andreessen Horowitz — known as a16z — went on the Joe Rogan podcast a few weeks ago and complained about what he saw as the rampant scourge of debanking, which he described as a deliberate effort by the Biden administration to cut off political enemies from the banking system.

"Debanking is when you, as either a person or your company, are literally kicked out of the banking system," Andreessen said. "And they don't have to debank you, they just have to put pressure on the private company banks to do it. And of course, JPMorgan can decide who they want to have its customers… because they're a private company. And so it's this sleight of hand that happens … it's a privatized sanctions regime that lets bureaucrats do to American citizens the same thing that we do to Iran — kick you out of the financial system."

Marc Andreessen is free to say whatever he wants and Joe Rogan is free to take whatever he says at face value, but it strikes me that if there were a broad-based government policy of cutting banking access to anyone not sympathetic to the Biden agenda, Joe Rogan would have known about it before that interview. Banks terminate their relationships with clients all the time, and the lack of warning, rationale or accountability in those decisions is a policy question that probably warrants further consideration. But as others have pointed out, Andreessen's account of the debanking scourge doesn't account for the possibility that banks are dropping clients of their own initiative or that those banks might have valid reasons for doing so — though because those reasons would be confidential supervisory information, we'll likely never know for sure.

What matters about this is that Members of Congress with real power are starting to take up Andreessen's characterization of what debanking is. Last week in the House Financial Services Committee, Rep. French Hill, R-Ark. — who may well chair the committee in the incoming legislative session — seemed to say that Congress intends to do something about this problem.

"Now the Republicans have the legislative and executive branch united [under Republican control] next year, I hope we'll be able to halt and reverse this kind of investigation," Hill said. "Legal businesses in the United States and this great country should have the freedom to bank and have financial services, and we've seen this over and over again, and this committee is going to take a strong position on that."

Politics and policy

The Fed's blatant attempt to de-bank crypto companies is illegal

April 26, 2023 10:30 AM

As I mentioned before, the inner workings of any given bank and its communications with its regulator are not public information, so neither I nor Marc Andreessen nor almost anybody else are able to say definitively what is going on here in appropriate context. It could be that there has been a concerted effort to freeze crypto out of the banking system through supervisory guidance in the mold of the infamous Operation Choke Point; it could also be that banks and regulators both saw risks in crypto in the aftermath of FTX's bankruptcy, or that banks alone decided the juice of crypto deposits isn't worth the squeeze of regulatory compliance. Each of these are plausible explanations, though to my mind some are more plausible than others.

But if there is a regulatory or legislative effort to compel banks to do business with anyone who wants to do business with them, that smacks of the kind of government overreach that conservatives typically oppose. 

Not all customers — even those engaged in legal businesses — present the same risks to a bank, and while banks may seem indistinguishable to the layperson, what makes one bank different from another is their varying degrees of expertise in various business lines or varying appetite for and management of risk. Flattening those distinctions would likely mean banks would either by rule or necessity have to hold commensurate capital to hedge their new and possibly unwanted risks — or drive more banks out of business altogether. That landscape looks uncomfortably like the kind of public utility model that banks — and their conservative allies — very much want to avoid.