Bank Supervisors’ Opaque Examination Activities Shroud the Realities of “Debanking” 

The battle over freezing and closing bank accounts is coming to a head. “Debanking,” as it is more commonly known, is not simply a result of banks willingly closing accounts; it is a product of the complex bank supervisory structure run by federal banking regulators.  

The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) each regulate and supervise banks depending on their charter. Regulation of banks includes anti-money laundering laws and requirements on how much capital banks must hold as a percentage of their assets. Supervision of banks is a complementary action that involves bank examiners conducting regular oversight of banks’ operations to ensure they are mitigating risks and compliant with existing rules.  

The regulation and supervision of the U.S. financial sector is highly complex and fragmented. The Government Accountability Office published a report in 2016 showing how “[f]ragmentation and overlap” in the system has contributed to inefficiencies and inconsistencies for regulation and supervision of the banking sector. The report specifically states that the inconsistencies in bank examination operations “can result in different conclusions regarding the safety and soundness of an institution and difficulties identifying emerging trends.” Banks are under pressure from a regulatory and supervisory regime that lacks coordination and transparency.  

Opacity in the supervisory process has exacerbated finger-pointing between banks, customers, and crypto firms, but the bad actors are unelected bureaucrats. During the Obama administration, the Department of Justice, FDIC, and OCC discouraged banks from conducting activities with certain businesses, such as firearm retailers and manufacturers, and payday lenders. Former Rep. Blaine Luetkemeyer (R-Mo.) highlighted documents showing the FDIC encouraged banks to “refrain” from doing business with these perfectly legal firms. Recently, Coinbase unveiled documents showing that the FDIC sent letters to banks arbitrarily asking them to pause all crypto-related activity. This underscores the significant sway regulators have on banks even without issuing formal rules through the Administrative Procedure Act’s notice and comment process.  

President Donald Trump’s new executive order (EO) on digital assets improves upon the status quo by prohibiting any future “Operation Choke Point” activity. The EO states that it is a priority for the administration to promote and protect “fair and open access to banking services for all law-abiding individual citizens and private-sector entities alike.” On its face, the EO does not compel access but simply ensures legal bank customers and crypto firms will not be arbitrarily denied access—a laudable directive.   

There have been previous bipartisan efforts to increase transparency in the bank examination process. One bill mandated the Federal Financial Institutions Examination Council (FFIEC), which is an interagency body composed of federal banking regulatory agencies, release information used by bank examiners to make certain supervisory determinations. The bill would have also established an “independent examination review director” to allow banks to file complaints with the FFIEC over disagreements on certain supervisory results. More transparency over bank supervision would enable both banks and customers to truly understand the scope of the regulatory pressure being exerted through the bank supervision process.  

There are two primary avenues for remedying the debanking issue. The first solution is to amend section 5318 of Title 31 of federal law. This provision of statute prevents banks from revealing the existence of suspicious activity reports (SARs). Ultimately, the prohibition prevents banks from adequately communicating with bank customers. It will also prevent banks from complying with certain state laws that require disclosures for shutting down or freezing accounts.  

The second solution is to remove regulators’ stranglehold on arbitrary bank examination parameters. Deleting the “Management” factor for the capital adequacy, asset quality, management, earnings, liquidity, and sensitivity (CAMELS) rating system will help disable arbitrary bank examiner determinations. The “Management” factor in CAMELS is a method for bank examiners to force banks to focus on immaterial risks that lack connection to a bank’s financial statements. It could also be used to deter banks from working with crypto firms. Bank examiners should only consider material financial risks. 

Banks, bank customers, and crypto firms all have valid arguments, but ultimately the buck stops with the regulators and examiners. Instead of vilifying private for-profit entities that lack the incentive to turn away business without good reason for doing so, policymakers should reform the bank examination process and create requirements that shed light on how regulators use this process to coerce the banking system to bend to their will.  

Want to continue the conversation? Email me directly at bbashur@narrativestrategies.com.

Bryan Bashur is a Director at Narrative Strategies, a strategic communications and public affairs firm, headquartered in Washington, D.C. Bryan was previously director of financial policy at Americans for Tax Reform and worked as a policy staffer for U.S. Senator Ted Cruz (R-Texas).