State Resolution Backs Federal Remedy For Politicized Debanking

Forbes

2 days ago

Louisiana Senate, where lawmakers recently passed a resolution in support of federal efforts to end ... More political debanking.
The problem of non-criminal 'debanking,' in which financial institutions deny service to a client for what are perceived to be political reasons, continues to garner the attention of lawmakers and the media. During a June 25 Senate Banking Committee hearing in which Federal Reserve chair Jay Powell fielded questions, Senator Tim Scott (R-S.C.), the committee chairman, thanked Powell for upholding his 'commitment to remove reputational risk from bank examination at the Fed.'
That move, Senator Scott added, 'is a necessary first step toward ending the politicization of bank supervision.' Following that hearing, Senator Scott took to X to provide additional commentary on the matter.
'Debanking federally legal businesses is un-American, and I'm glad the @federalreserve followed through on their commitment to remove reputational risk from bank examination,' Scott posted, adding that he will 'continue pushing to end the politicization of bank supervision.'
Recent developments suggest that additional state regulation is not the optimal remedy to politicized debanking when it is existing federal regulations that are the root cause. Furthermore, additional attention to the matter appears to be resulting in voluntary corrective action.
'Financial firms are warming to customers they once shunned under progressive pressure, addressing conservative states lamenting the lack of 'fair access' to banks, and more recently, trying to avoid the wrath of a president bent on settling scores,' noted a June 5 Semafor article on Bank of America's recent decision to again offer their services to CoreCivic, the second largest private operator of prisons and detention centers in the US. That article was published two days after Citigroup announced it would resume doing business with gun makers and that it would 'conduct employee training to root out any political bias.'
On June 10, one week after that Citigroup announcement, the Louisiana Legislature passed the nation's first state resolution expressing support for efforts by the White House and Congress to end unjustified and politically motivated debanking. The language of that resolution acknowledges that banks are not to blame for unjustified debanking, explaining that 'the complexity of federal laws and regulations and the broad discretion of regulators have allowed federal regulators to weaponize banks for far too long.'
The Louisiana resolution goes on to explain that 'if a regulator decides a bank is not adequately managing risk, does not have a good enough system in place to detect and deter financial crimes, or is closing accounts too slowly, the bank can face significant monetary penalties and costly lawsuits, and potentially criminal charges.' Texas lawmakers filed a similar resolution this year, but it did not pass before the conclusion of their biennial regular session in early June.
Rather than seeking to thwart debanking through new state legislation or regulation, a resolution like the one passed in Louisiana that expresses support for a federal remedy is 'a better use of state legislators' time,' says James Erwin, director of innovation policy at Americans for Tax Reform. 'At the end of the day,' Erwin adds, 'this is a problem for federal regulators.'
If lawmakers in other states want to join Louisiana in urging their congressional delegation to end political debanking, Senator Tim Scott has a bill, the FIRM Act, that they can get behind. The FIRM Act removes reputational risk from the jurisdiction of regulators. Erwin says the FIRM Act, if enacted, would 'stop overzealous regulators from leveraging their authority to unjustly harm legitimate industries and individuals.'
Political Debanking, Like AI Regulation, Requires Federal Remedy
After House approval of the One Big Beautiful Bill Act (OBBBA), Senate Majority Leader John Thune (R-S.D.) and his colleagues are aiming to pass their version by July 4. Both the House-passed version of OBBBA and the Senate draft include provisions blocking states from regulating artificial intelligence (AI).
Despite some GOP blowback, White House officials and other preemption backers argue that a regulatory framework for AI must be established on a national basis. Likewise, many of those seeking to end political debanking contend that only a federal level reform can remedy the matter.
'While stopping political debanking is critical, it's ultimately an interstate issue that Congress must lead on—which is why Senator Tim Scott's FIRM Act is so important to prevent federal regulators from weaponizing the financial system,' says Vance Ginn, president of Ginn Economic Consulting who previously served in the White House Office of Management and Budget.
Governor Greg Abbott (R-Texas) recently announced he is calling the Texas House and Senate back for a special legislative session that will begin July 21. While the Texas resolution similar to the one recently signed by Governor Landry did not pass earlier this year, the special session presents opportunity to get it done this year.
'Louisiana got it right by passing a resolution defending financial freedom,' adds Ginn, who is also a staff economist at Americans for Tax Reform and who previously worked for the Texas Public Policy Foundation. 'Texas should have followed suit by passing Sen. Tan Parker's resolution, but since it died, Gov. Abbott should add it to the forthcoming July 21 special session. No American should lose access to banking because of their lawful business or personal beliefs.'
A 50-state patchwork of variable and contradictory state regulations aimed at ending political debanking would come with adverse economic effects. That would also be the case for a 50-state patchwork of state AI regulations. That goes to explain, even if it's confusing to some in Congress, why Republicans who typically support pushing most decisions down to the states believe that, when it comes to regulation of AI and ending political debanking, the federal level is the proper venue for reform.