Trump Signs Executive Order on Banking Practices

Recently, former President Donald Trump issued an executive order that aims to change how bank regulators operate. This order specifically directs them to withdraw guidance that could result in politically motivated refusals of banking services.

Interestingly, a number of crypto entrepreneurs, as well as some prominent conservatives, have reported difficulties in opening bank accounts, allegedly due to actions taken by regulators during the Biden administration.

The order is titled “Ensuring Fair Banking for All Americans,” but experts suggest it may not be very beneficial for crypto firms that feel excluded from the traditional banking system. They argue that the order fails to address the bigger issue of “reputational risk,” which refers to a bank’s hesitance to work with certain controversial customers.

Critics argue that banks should only rely on objective criteria, such as the financial stability of potential clients, when deciding to grant account access.

Changes to Guidance Documents

Some believe this order could make certain individuals happy, though there’s skepticism about its actual effectiveness.

The executive order instructs regulators to eliminate references to “reputational risks” in their guidance, manuals, and other materials. However, there’s a sentiment that it’s unclear whether past decisions were indeed politically motivated.

Reputation risk can affect a bank’s profits. For instance, if a major investment fund expressed concerns about a bank’s association with a controversial client, it might move its business elsewhere, making the bank more cautious.

Moreover, it’s worth noting that banks have the ability to disregard such guidance documents, which raises questions about the real-world impact of this order.

As one expert pointed out, agencies cannot simply claim violations based on guidance alone; they need to demonstrate that laws or formal regulations were broken.

Regulatory Insights

Julie Hill, from the University of Wyoming, highlighted that Trump’s appointees have already indicated a shift away from using reputational risks. Nevertheless, many staff members from the Biden administration remain in place, and regulatory tools beyond reputation risk still exist that can influence banks to deny accounts.

The Anti-Money Laundering Act, for example, is partially responsible for why banks may choose not to serve specific customers. Hill noted that most suspicious activity reports do not lead to follow-up actions, meaning banks often opt not to deal with those flagged activities to avoid regulatory scrutiny.

Additionally, there are management reports regulators can utilize to suggest which customers banks should approach with caution.

According to Hill, these ratings remain confidential, leading to a lack of transparency about how regulators pressure banks.

Accountability in Banking

The executive order also tasks regulators with identifying financial institutions that, whether formally or informally, practice politically motivated banking decisions.

Finding explicit evidence of such practices could be straightforward if it comes from a federal regulator. Still, it is much more complicated to demonstrate when a bank’s decisions seem politically motivated without a clear basis in risk or benefit.

There are genuine concerns about how well regulators grasp this issue and if they feel banks are required to disclose such practices.

Ultimately, both experts noted that a future administration could easily overturn this executive order and reinstate the previous guidelines on reputational risk.

As noted by one expert, changes in enforcement could vary significantly depending on who is in charge.

In summary, while there may be some movement toward fairness, the long-term impact of these executive actions remains uncertain.