U.S. policymakers from across the political spectrum are coming to a consensus on several contributing causes of account closures: the anti-money laundering framework and the opacity of the examination process. This week, current and former lawmakers, academics and industry participants offered their perspectives.
On the Hill
The Senate and House held hearings this week highlighting these regulatory issues, from the nebulous term “reputational risk” to the threat of CAMELS ratings downgrades to an AML system that prizes quantity of reports over quality. Read BPI’s 10 key takeaways from the Senate hearing here. During the House Subcommittee hearing, Rep. Dan Meuser (R-PA) warned that “regulators resorted to vague and interpretive regulatory letters threatening banks with negative examination scores and fines if they continue their partnership with digital asset companies.” Rep. Ann Wagner (R-MO) echoed these concerns, emphasizing that “regulators should not be picking winners and losers.”
What are the fixes?
Key policy solutions emerged during the hearings. For one, policymakers should reform the AML framework to be more effective. “There is additional work to be done by the Treasury Department, the Federal Reserve, the FDIC and other regulators to issue clear anti-money laundering rules and guidance for banks to follow, which would reduce the incentive to use debanking as a form of risk management,” said Sen. Elizabeth Warren (D-MA). Bank examination should also be fixed so that regulators do not pick and choose which legal businesses banks can or cannot serve. “We have the most transparent, liquid capital markets in the world because of proper regulation,” said Sen. Pete Ricketts (R-NE). “Regulation actually got us to the point where we have these great capital markets, and it’s at risk when we have regulators that are undermining the faith in that. We have got to make sure that we do not weaponize our regulators to push an agenda.”
A Bloomberg editorial on Thursday said that the “debanking” debate has exposed a problem that transcends political rhetoric or crypto industry advocacy. Regulators have had good reason to scrutinize crypto, the editorial board wrote, but “it remains true that many innocent customers — conservatives and liberals, immigrants and charities — lose access to banking services because of anti-money-laundering rules. Common-sense reforms could help ease the burden on banks and limit the harm to customers.” The editorial cited the example of raising the decades-old Currency Transaction Report to about $72,000 from $10,000 to adjust it for inflation, which would cut the number of filings by at least 90 percent. “Little would be lost, as law enforcement has reviewed fewer than 3% of filings since 2014,” the editorial said. The government should expedite the implementation of the 2020 Anti-Money Laundering Act, the editorial board wrote. That law would limit suspicious activity reports on low-risk customers and activities and help banks test new technology to detect money laundering. “Banks should be given more leeway in judging whether a customer truly represents a risk,” the editorial said. “More transparency about such decisions, by banks and regulators alike, might ease the conspiratorial fervor among critics.”
FDIC turns the page
The FDIC on Wednesday released a batch of 175 documents related to the supervision of banks engaging in crypto activities. The action came as part of a court challenge to the agency seeking information about its oversight of banks and crypto. FDIC Acting Chair Travis Hill described the document release as a “commitment to enhance transparency.” Of the “pause letters” that the FDIC released, Hill said “these and other actions sent the message to banks that it would be extraordinarily difficult—if not impossible—to move forward” on engaging with crypto. “As a result, the vast majority of banks simply stopped trying.” He said the FDIC is “actively reevaluating our supervisory approach to crypto-related activities,” including “replacing Financial Institution Letter (FIL) 16-2022 and providing a pathway for institutions to engage in crypto- and blockchain-related activities while still adhering to safety and soundness principles.”
‘Whole-of-government’ effort
In a recent Banking with Interest podcast interview, former Senate Banking Committee Chair Pat Toomey described a “whole-of-government effort” under the Biden administration to cut the crypto industry off from the banking system. Toomey pushed back on the allegation that large banks “debank” political conservatives. “I would be shocked if there is a significant bank anywhere in America that is systematically choosing to forgo doing business with half of America,” Toomey said. He suggested that individual customers’ unexplained account closures are “not because the CEO wants to debank conservatives,” but because of obligations such as Know Your Customer requirements and “extensive regulations” on suspicious activity reporting with strict confidentiality requirements.
Conclusion
The regulatory context around account closures is complex, but important parts of the solution are straightforward: making anti-money laundering rules more effective and supervision more objective and transparent. Policymakers should start with implementing the reforms that were already enacted in the Anti-Money Laundering Act, and the federal banking agencies should take a closer look at the supervision framework.
