Senate Banking Committee Chair Tim Scott, R-SC, introduced a bill Thursday meant to eliminate reputational risk as a metric regulators would use to gauge the safety and soundness of banks.
“This legislation, which eliminates all references to reputational risk in regulatory supervision, is the first step in ending debanking once and for all,” Scott said in a statement Thursday.
De-banking has gained traction in recent weeks after President Donald Trump called out Bank of America and JPMorgan Chase during a virtual appearance in January at the World Economic Forum in Davos, Switzerland.
When BofA CEO Brian Moynihan, on stage during a Q&A session, asked Trump how his executive orders might affect gross domestic product, inflation and stock prices, the president replied: “You’ve done a fantastic job, but I hope you start opening your bank to conservatives.”
“We bank everybody,” Moynihan said at a separate appearance last month. “The real question was about over-regulation, frankly.”
While the issue has taken root among Republicans, at least one Democratic senator has expressed similar concerns around de-banking.
At a hearing last month, Sen. Elizabeth Warren, D-MA, cited an analysis revealing nearly 12,000 de-banking related complaints filed by consumers over the past three years, with more than half of those complaints made against the four biggest U.S. banks – JPMorgan Chase, Bank of America, Citi and Wells Fargo.
“This shouldn’t be happening, and we need to figure out why and who is responsible,” she said.
Scott identified “debanking” among his top priorities, describing it as discriminatory and un-American.
“Financial regulators have weaponized their power to target disfavored political groups and individuals in America, hiding behind opaque veils of confidentiality and insincere proclamations of independence. We must rein in these rogue regulators,” Scott said in a one-pager of Thursday’s bill.
As part of the measure, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the National Credit Union Administration would not be able to promote new rules based on reputational risk and would need to report to Congress that they have removed reputational risk as a component of supervision.
Reputational risk can describe the potential negative consequences such as decreased public confidence, customer loss, litigation or reduced revenue that can result from negative publicity about a financial institution's business practices, regardless of whether the publicity is accurate, the bill noted.
Scott’s bill argues that using reputational risk as a factor in determining a depository institution's supervisory rating is problematic for two reasons: it's not statutorily required, and it represents an improper use of supervisory authority.
The bill will not affect quantitative supervisory measures like concentration and liquidity risks.
JPMorgan, for one, voiced its support for the bill.
“This bill will shine a light on the opaque supervisory process and regulatory overreach that have forced banks to err on the side of caution,” Lauren Bianchi, a spokesperson for the bank, told The Wall Street Journal.
Twelve other Republican lawmakers backed the bill, which also saw support from treasurers and other finance officials in 22 states who sent a letter to Scott and other lawmakers, including Warren. It’s unclear how Warren feels about Scott’s specific legislation.
Trade groups, too, expressed support.
“The FIRM Act restores banks’ freedom to make their own decisions about who they can and cannot bank by limiting regulators’ ability to use subjective concerns about ‘reputational risk’ to pressure financial institutions not to bank certain customers,” American Bankers Association CEO Rob Nichols said in a statement. “Common-sense legislation reinforcing that access to banking services should be determined by prudent risk management at banks and not the personal perspective of regulators.”
