Washington Must Continue to Rollback Democrat-Era Financial Regulatory Abuses | Opinion

The Trump administration and Republican lawmakers are making strides to unwind misguided banking regulations, particularly government-driven debanking. In some instances, regulatory debanking has been driven by vague and excessively broad application of banking regulations. In other cases, it has been outright regulatory malfeasance.

An example of the former category is the Bank Secrecy Act (BSA), which, among other things, obliges banks to monitor for any transaction that deviates from a customer's "normal activity"—a nebulous requirement with no objective benchmarks—and even file a Suspicious Activity Report (SAR) with the government. If banks believe there is the slightest risk of illicit activity on the part of their customer, they often must report that possibility to the Treasury Department's Financial Crimes Enforcement Network (FINCEN), cease doing business with that customer, and refrain from explaining the sudden debanking to their customer. No wonder legitimate businesses can be outraged.

Examples of regulatory malfeasance occurred during both the Obama and the Biden administrations. Under former President Barack Obama, in what became known as Operation Choke Point, the White House directed financial regulators to apply pressure on banks to debank customers in certain industries it disliked, including gun manufacturers and small dollar lenders. While the first Trump administration put a stop to Operation Choke Point, the Biden administration launched its own intense pressure campaign on banks, with Operation Choke Point 2.0, this time denying banking services to crypto-oriented firms. In both Operation Choke Points, "reputational risk" management was invoked as the pretense for the debanking.

Thankfully, Congress and the Trump administration are taking these past abuses seriously. In March, the Trump Federal Deposit Insurance Corporation (FDIC) announced plans to release a framework that removes all references to reputational risk from its guidance. The Office of the Comptroller of the Currency (OCC) took similar steps to removing regulatory barriers to cryptocurrency in banking while preserving the regulator's ability to assess safety and soundness. The OCC then announced that it, too, would remove reputational risk from its supervisory process altogether.

On the legislative front, Representatives Andy Barr and Ritchie Torres, on the House Committee on Financial Services, introduced bipartisan companion legislation to Senate Banking Committee Chairman Tim Scott's bill, the Financial Integrity and Regulation Management (FIRM) Act, to stop debanking by regulation. These bills will prevent regulators from using so-called "reputational risk" as a tool for discriminating against disfavored industries.

Enacting these bills is important because, absent clear legislative guardrails, future administrations could simply reverse agency guidance with the stroke of a pen, reintroducing instability and politicization into the financial system. Congress must ensure that future administrations are prevented by law from weaponizing regulatory powers.

However, in their zeal to cut off partisans from future abuse, Congress must be careful not to overcorrect. Just as the government should not pressure banks to debank politically disfavored customers, the government should not be in the business of mandating with whom banks do business either, essentially turning them into a public utility—that's not the role of government and would create new problems.

Lawmakers should instead focus on enacting needed reforms to the current BSA and anti-money laundering (AML) framework as well as updating the threshold for filing SARs to modernize and better protect the banking system and serve American businesses and taxpayers.

While Republicans and the Trump administration work to streamline regulations, state legislatures should refrain from enacting their own patchwork of state-based regulations of national banks. A fragmented regulatory system could result in conflicts of law, creating an environment rich with confusion, litigation, and inefficiency. Instead, states should follow the lead of Texas lawmakers and their recently introduced resolution calling on Congress and the Trump administration to develop a solution to debanking and rogue federal regulators. The problem began at the federal level. Congress should fix it.

A depoliticized financial sector is vital not only to protect individual industries, but to uphold broader American principles of free enterprise, innovation, and opportunity. Lawmakers must continue to capitalize on the momentum to rid our financial service systems from politicized regulations and instead focus on policies that ensure sound, unambiguous regulations free from political bias that don't overregulate the free market.

Pat Toomey, a Republican, served as a U.S. senator from Pennsylvania, 2011-2023. He is an advisor to Americans for Free Markets.

The views expressed in this article are the writer's own.