President Trump recently signed a new executive order titled Guaranteeing Fair Banking for All Americans (the Executive Order or Debanking Order). The Executive Order seeks to scrutinize bank practices related to “debanking,” a term referring to terminating or denying banking and financial services to individuals or businesses based on non-financial criteria, such as a reputational risk to a bank. Specifically, the Executive Order notes that one of the purposes of it is to address debanking “on the basis of political or religious beliefs or lawful business activities.”
Overview of the Executive Order
The Executive Order mandates that all federally insured banks and financial institutions provide equitable access to financial services. The Debanking Order explicitly provides that banking decisions must be made on the basis of “individualized, objective, and risk-based analyses.” Specifically, the order directs federal banking regulators to remove the use of reputational risk or similar concepts from guidance documents, manuals, and other materials within 180 days from the date of the order. The Executive Order also provides that:
- Federal banking regulators should also consider eliminating any regulations that could “result in politicized or unlawful debanking.”
- The Small Business Administration (SBA) give notice to financial institutions to which it guarantees loans under various SBA lending programs that each is subject to the SBA’s jurisdiction and supervision.
- Financial institutions subject to applicable SBA requirements must make reasonable efforts to identify and reinstate previous clients denied service though debanking in violation of section 7(a) of the Small Business Act (15 U.S.C. 636) or any requirement in an SBA Standard Operating Procedures Manual or Policy Notice related to a program or function of the SBA’s Office of Capital Access.
- Directing the Secretary of the Treasury and Assistant to the President for Economic Policy to develop a strategy to scrutinize debanking, including proposing legislation or regulatory schemes to combat and/or prevent the same.
Implications for Financial Institutions
As a result of the Executive Order, institutions ought to reassess their internal policies to ensure alignment with the new federal requirements. This could involve revisiting how a bank assesses risk and makes decisions regarding client relationships. Legal and compliance departments within these institutions may need to revise or develop new criteria related to accepting or terminating banking clients. Failure to do so could result in scrutiny from financial regulatory institutions.
Challenges and Criticisms
Despite its intentions, the Executive Order has faced criticism from various quarters. Critics argue that the order could impose undue burdens on banks, complicating the process of risk management and potentially leading to increased costs. There is also concern about the order’s potential to limit banks’ discretion in managing reputational risks associated with certain clients and/or industries.
Further, some argue that the Executive Order is ambiguous. Specifically, some experts provide that a lack of precise guidelines for debanking compliance could lead to inconsistent application and potential legal disputes.
President Trump’s Debanking Order signifies a shift in the regulatory landscape for financial institutions. While it seeks to ensure fair access to banking services, it also introduces new legal and operational challenges for banks. As the Executive Order takes effect, banks must navigate these complexities carefully, balancing compliance with their risk management strategies.
President Trump’s Executive Order on debanking creates new considerations regarding internal compliance policy. Buchanan’s Banking and Finance practice group may be able to provide guidance to those seeking to navigate compliance under the new rules while optimizing risk management strategies.