Bloomberg is right, and wrong, about banks and the culture war
The editors of Bloomberg News have written an editorial with the headline “Don’t Drag Banks Into the Culture Wars”. In it there is a fair amount of wisdom, but unfortunately there is also what could charitably be called a misunderstanding that risks undoing that wisdom. If we don’t want banks to be a front in the culture war we need to face up to banks and bank regulations as they actually are, not as we wish they were, and there is where it gets messy.
The editorial starts off promising enough, complaining that politicians are trying to “pressure banks into doing their crucial jobs for them” on issues like the environment and firearms. All this is true, but then the editorial goes off the rails.
The editors compare efforts to get banks to cut off energy companies with laws excluding banks that refuse to do business with gun makers from state and municipal bond deals. In this, the editorial asserts a false equivalence between efforts to push banks to cut off services to certain industries with efforts to encourage banks to not discriminate against certain industries. It also ignores the history of politicized banking and banking regulation that led to the place we are now.
On one side we have the efforts to get banks to curtail services to disfavored but legal industries. This often takes the form of jawboning or using opaque tools like bank supervision and gaming risk weights for assets. This allows the bank regulator to de facto regulate downstream industries they lack the legal authority to regulate directly. By extension, it allows whoever has the regulator’s ear to regulate those industries, even if they lack the power to do so directly.
This is especially insidious because the bank regulators don’t need to bring an enforcement action or promulgate a rule to stop banks from serving disfavored industries. Oh no, nothing that transparent. Instead, they can just get banks to understand that if they don’t cut ties the next examination will have to be more rigorous, which is regulator-speak for expensive and unpleasant. The regulator isn’t ordering the bank to do anything, it is merely changing the calculation the bank needs to make to assess whether the customer in question is worth it. This is the story of Operation Chokepoint, among others.
On the other side we have the recent state efforts to disqualify banks from participating in state and municipal debt deals if the banks discriminate against a certain industry like firearms or energy. The word discriminate is important. The laws do not require banks to provide services for a client in that industry, but they can’t refuse because of the client’s industry without losing eligibility for bond deals. So, if a gun company came to a bank for a loan, is denied, and the bank wouldn’t make the loan because it was a gun company, there is an issue, but if the bank wouldn’t have made the loan to an otherwise similar customer in a different industry (because, for example, the firm’s financial situation was too risky) then the bank is not penalized for not making the loan.
These laws arose in response to a wide-spread effort to have banks de-bank certain industries, like guns and fossil fuels, that are unpopular with progressives but where regulation by legislation is not possible for political or constitutional reasons. Some banks, including some of the largest banks, adopted policies excluding certain legal industries with the intent of discouraging or preventing to provision of legal products and services.
In response, some states refused to do business with those banks. These decisions were motivated by a mixture of practical and political concerns. For example, if you are the treasurer of a state whose economy is heavily dependent on fossil fuels, it may be in your interest to push back on any effort to disadvantage that industry. Likewise, if you believe you have an obligation to protect your citizen’s constitutional rights, and you believe the attempted de facto regulation by banks is a threat to the practical viability of those rights, you might feel obligated to use what leverage you have to combat that effort. Of course, it obviously doesn’t hurt if the decision is popular with voters.
These actions are unsurprisingly controversial and there are potentially valid critiques of them. For example, if refusing to do business with certain banks materially raises the price of placing debt, that could arguably run counter to the interests of the state and obligations of the relevant official. This is where the recent laws come in, allowing the state legislature to clearly direct relevant officials as to how to preserve the state’s interests.
The laws have also been critiqued for infringing on the bank’s discretion as to how it runs its business. While these laws do not obligate banks to serve anyone, it is undeniable that they are also an example of the state seeking to indirectly (though transparently) influence bank’s decision making. Of course, banks are given an amazing amount of power and protection via public policy, and how those powers and protections are justified to facilitate the economy, not to turn banks into de facto regulators. As such, any critiques of these laws grounded in claims of a “free market” or that banks are “private actors” should be met with at least some skepticism.
However, the Bloomberg editorial engages in some faulty thinking when it critiques these laws as an effort to avoid the legislative process to fight gun control by using financial services as “proxies”. This gets it exactly backwards. The pressure placed on banks to cut off guns or fossil fuels, or anything else is an effort to avoid the legislative process. When Andrew Ross Sorkin wrote “How Banks Could Control Gun Sales if Washington Won’t” he wasn’t calling for banks to obey the law, he was calling for them to, in effect, make it. When Citibank announced their firearms policy it was clearly with to the intent of imposing change on society that elected officials had so far refused to do. When Rep. Ocasio-Cortez famously said “there is more than one way to skin a cat” she was explicitly talking about ways outside of legislating. Whether the anti-boycott laws are a good idea can be debated, but they are clearly, at least in part, a defensive legislative response to an extra-legislative attack.
The Bloomberg editors are right that banks should not be dragged into the culture war, but to actually make that happen it may take more legislation, not less. Banks are vulnerable to so much opaque coercion by regulators, legislators, and others, and they pose so many principal — agent problems. Stripping regulators of some powers (such as using the concept of reputation risk) and stronger legal obligations on banks (such as an affirmative non-discrimination duty) might be necessary to de-weaponize banking.
Are there arguments that these ideas would be a cure worse than the disease? Yes. Are there arguments that this is necessary to preserve the proper role for banks and the legislative process? Yes. Does any of this reflect well on us as a society? No. That this is where we find ourselves is damning, but here we are, and we need to face it like it is.