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On Banks and Bullets (and other controversial topics)
Important Disclaimer: This piece is not about the merits of gun policy, or abortion, or any other underlying controversial policy. It is…
Important Disclaimer: This piece is not about the merits of gun policy, or abortion, or any other underlying controversial policy. It is about the involvement of banks in those controversies and whether the role government plays in banking makes banks different from other firms.
During the Senate Banking Committee hearing on the Consumer Financial Protection Bureau (CFPB) Senator John Kennedy (R-LA) asked CFPB Acting Director Mick Mulvaney whether it was appropriate for banks like Citigroup and Bank of America to restrict services to gun makers and whether that should be of interest to the CFPB. Mulvaney pointed out that so long as there wasn’t an antitrust issue and consumers could make a choice, he would be hesitant to have the government get involved. Sen. Kennedy pressed by asking if the answer changed if the banks were unwilling to extend services to Planned Parenthood or other controversial entities. Mulvaney repeated his view that so long as the market provided consumer choice he was loath to get the government involved.
Mulvaney’s response makes sense from a consumer (as the CFPB defines it) perspective. There are numerous banks out there and a consumer who opposes Citi or Bank of America’s position can move their accounts to another bank. However, that isn’t necessarily the end of the discussion, even if it may make more sense in a hearing with the bank regulators or the banks themselves.
First, the primary losers of Citi’s and Bank of America’s policies aren’t consumers as the CFPB defines them, but businesses. It is the firearms businesses who won’t get credit or access to payments services, not “consumers”. The CFPB has limited authority or responsibility in the small business context.
Secondly, and likely more importantly, this is not a pure market story. If our standard model assumes a free and competitive market then the reasonable answer is to say “Well, if Bank of America won’t serve those businesses someone else will.” And while that may turn out to be the case here, we also need to acknowledge that banks are so dependent on the government to function and profit. This arguably makes banks different from other firms.
Banking relies on the government to an unusual degree. As a partial example: a bank needs a charter granted to it by the federal government or a state government to operate. This not only grants banks’ powers, it also limits entry of new competitors. Almost all banks have their deposits insured by the federal government through the Federal Deposit Insurance Corporation. Banks can also borrow from the Federal Reserve through the discount window, and rely on payment mechanisms like Fedwire and ACH that are facilitated by the government. The Federal Reserve pays interest on banks’ deposits. Federal and state law also give banks advantages over their non-bank competitors in the areas of lending and money transmission. Big banks may actually be protected from competition as a result of government regulation, lowering the ability of another firm to serve customers if large banks like Citi and Bank of America won’t. Finally, as Sen. Kennedy pointed out, banks, including Citi and Bank of America have received massive government (i.e. tax payer) funded bailouts to save the banks from their poor decision making. The only reason Bank of American and Citi are around to take these positions may be the public’s largess.
It is a reasonable question whether the tax payer, through the government, should effectively be forced to support banks using their market power to force social change above and beyond what the traditional mechanisms of policy creation (laws and regulation) are willing to do. Citi’s statement clearly indicates an intent to have financial services firms take a leading role in changing the market. After all, the banks’ market power is provided in large part by government policy and tax payer funding.
On the flip side, to the extent you think it is good for banks to flex their market muscles for social change, their dependence on government presents a risk. While some of that risk is overt and consistent with general regulatory principles (e.g. as Prof. Josh Blackman points out, Georgia has a law prohibiting banks from discriminating against legal firearm businesses), much of the risks banks face is “regulation by raised eye-brow” where a bank regulator can make a bank’s life hard based on subtle and subjective criteria like “reputational risk”. This was used in the infamous “Operation Choke Point” to discourage banks from servicing firearms businesses (among others). Nothing says this technique could not be used to limit access to other disfavored customers or force banks to serve politically favored customers as well. Banks are far more vulnerable to government coercion than a firm like YouTube because of their dependence on government.
What should we do about it this? The ideal answer is to roll back the government support for banking and make the market for financial services more competitive and equitable. The less government supports an industry the less firms can leverage power granted to them by the government, and the less leverage government has over private firms. Short of that, we are going to be left with a question of how banks, policy makers, and citizens divvy up social policy, and that is a tricky question indeed.