There was a mix of anger and bafflement on Wall Street late on Thursday January 14 as the Office of the Comptroller of the Currency (OCC), a US banking regulator, sprung a new rule on the sector in the 11th hour of the administration of outgoing president Donald Trump.
This rule requires banks to risk-assess customers on an individual basis rather than make decisions based on an entire category of customer. It means that banks can no longer adopt policies on the basis of entire industries or types of business activity. This means that their ability to make lending decisions based on corporate responsibility policies is severely constrained.
It was approved by acting comptroller Brian Brooks on what was his very last day in the post. It was presented by the OCC as ensuring “fair access to banking services”, but banks argue it is rushed and deeply flawed.
“Banks should not terminate services to entire categories of customers without conducting individual risk assessments,” the OCC said in a statement on Thursday night announcing the decision. “Elected officials should determine what is legal and illegal in our country.”
As it stands [the rule] pitches one corporate and social responsibility priority against another
The OCC cited the Dodd-Frank Act of 2010 in support of its rule, noting that the legislation passed in the wake of the global financial crisis expanded the mandate of the regulator to ensure fair access to banking services.
As it stands, however, it also pitches one corporate and social responsibility priority against another. While the rule is presented as promoting fairness and inclusion, it would also have the effect of preventing banks from adopting policies that halt financing to a particular industry, such as fossil fuel polluters or gun manufacturing, for example.
The rule, which applies to banks with more than $100 billion of assets, is not designed to prevent banks from making individual business decisions about who to lend to, the OCC said. And it noted that, as a result of considering more than 35,000 comments on its proposals, it had decided to remove a prohibition on banks denying a financial service if it would result in the denied party being prevented from entering or competing in a market or would benefit another party in which the bank has an interest.
Hastily conceived
None of that looks likely to assuage banks, however. The Bank Policy Institute (BPI), a lobby group for the industry, tore into the decision in a strongly worded statement.
“We are disappointed the acting comptroller chose to fast-track the final approval of this hastily conceived and poorly constructed rule on his last day in office,” said Greg Baer, president and CEO of the BPI, in the statement. “The rule lacks both logic and legal basis, it ignores basic facts about how banking works, and it will undermine the safety and soundness of the banks to which it applies.”
For these reasons, Baer argued that the rule would be unlikely to withstand scrutiny, and banks will be hoping that the incoming administration of president-elect Joe Biden can facilitate a speedy reversal of the rule through use of the Congressional Review Act.
In the meantime, the first reaction from bank heads could come early today, Friday January 15, as JPMorgan, Citigroup and Wells Fargo kick off the bank earnings season for the full year 2020. JPMorgan reports at midday London time, with Citi and Wells Fargo following at 1pm.
