We don't want the OCC rule “Political Discrimination”
Large US banks have long refused to lend to miners using a mountaintop removal technique. Wells Fargo says it bans such loans because it recognizes "heightened community concerns about the practice".
Should banks like Wells Fargo be allowed to stop lending to an industry because of its environmental impact or lack of commitment to social justice? Doesn't Wells Fargo have an obligation to be neutral?
J.P. Koning, a CoinDesk columnist, worked as a stock researcher at a Canadian brokerage firm and was a financial writer for a major Canadian bank. He runs the popular moneyness blog.
This is the problem that is at the center of a rule change recently proposed by Brian Brooks, head of the Office of the Comptroller of the Currency (OCC), a major US banking regulator. Brooks and OCC chief economist Charles Calamoris want to deter banks from "politically motivated discrimination". Their rule would prevent bankers from using any other than regular credit and operating criteria in evaluating a company seeking financial services.
The result? Wells Fargo would have to re-bank miners who practice mountaintop removal. Banks would also have to resume lending to oil companies involved in exploring Alaska's North Slope. Wells Fargo, Citigroup and JP Morgan Chase have promised to avoid this practice. Also, they must not give in to activists calling for accounts to be closed for groups they do not like, such as planned parenting.
I do not agree with the rule proposed by the OCC. The underlying motivations are good, especially those related to Operation Choke Point (see below). But I don't think the US needs it. It is ironic that in attempting to depoliticize the banking system, the OCC is likely to rule out greater diversity in service providers.
Operation Choke Point
Operation Choke Point was an Obama-era program that sought to separate unfavorable industries from the banking system. In 2011, the Federal Deposit Insurance Corporation (FDIC), a federal government agency that oversees and audits US banks, placed a number of perfectly legal business categories on their "high risk" list.
One of them was payday loans, an industry that is often badly done for chasing after a poor clientele. FDIC internal emails expressed intent to "obtain payday loans" and "find a way to stop our banks from facilitating payday loans".
We now have decentralized platforms on which maligned but legal companies can secure their funding.
After several payday lenders sued the FDIC for violating their legal rights (OCC's Calomiris provided expert evidence), the FDIC agreed to resolve the dispute. The regulator admitted that "certain employees acted in a manner inconsistent with FDIC guidelines," and issued a statement reiterating that performing their duties is based on "laws and regulations, not up." personal beliefs or political motivations ”. And so Operation Choke Point was closed.
I think everyone can agree that Operation Choke Point was reprehensible. The core regulatory and central banking layers of the financial system must remain neutral. Regardless of the type of legitimate company banks choose to serve, each bank should be given equal access to the Federal Reserve's major payment instruments. FDIC officials should also not be able to use their audit powers to promote businesses.
Fairtrade bank accounts
The problem with the OCC's new fair access rule is that it has a huge explosion radius. Yes, it would prevent future government-run throttles. However, it would do unnecessary harm to banks' efforts to design their brands to satisfy emerging consumer tastes.
The 21st century consumer wants to know more about the origins of the things they buy. We don't just want tuna, we want dolphin friendly tuna. We don't just want coffee, we want Fairtrade coffee. And we don't want our t-shirts in sweatshirts to be made from Xinjiang cotton. We want ethical t-shirts.
See also: J. P. Koning – The Standard for Revolutionizing Payments
This shift in consumer spending has spilled over into the financial world. Think socially responsible indices, green exchange traded funds, and activist investing. We see it in the gold markets too. The world's most important trading post, the London Bullion Market, has set up a responsible supply chain where refineries are required to verify that miners are using mercury safely and are not involved in human rights abuses.
In banking, credit is the fodder for creating safe deposits. So if a bank wants to attract modern consumers by establishing a clean supply chain (also known as a Fairtrade bank account), it means cutting down the feedstock for deposits, e.g. B. Loans for miners.
However, the OCC rule would block the entry of this new consumption into banking.
Is banking something special?
The argument against allowing Fairtrade bank accounts is, "Banking is special." Brooks and Calomiris argue that government charter and direct access to the Federal Reserve oblige banks to provide services to all businesses. And so America has to do without the bank versions of dolphin-proof tuna and organic milk.
However, this downplays the competitiveness of the US banking system.
If Wells Fargo avoids making a profitable loan to an Alaska oil producer because they want to green their deposits, Bank of America, Regions Financial, or some other bank that is not quite as concerned will sneak in to take out the loan and devour the forgotten profits.
See also: J.P. Koning – The dark future where payments become politicized and Bitcoin wins
Banks are not the only source of finance for businesses, either. The US has some of the deepest capital markets in the world. Our Alaskan Explorer can issue commercial paper, junk bonds or stocks. Or maybe an enterprising intermediary, such as a private equity firm, can find a way to break the Alaskan oil embargo by borrowing from Wells Fargo and transferring the funds to the blacklisted company.
After all, we don't live in the same world as we did five years ago. With the advent of public blockchains like Ethereum, we now have decentralized platforms on which maligned but legal companies can secure their funding. Just create a SEC-approved token and list it on a decentralized switch. Voila, Arctic oil drilling bought and paid for.
For those who are concerned about accessibility, we don't need the new rule of the OCC. Payday lenders have already proven their best defense: the justice system to protect themselves from future government sponsored choke points. The OCC rule would only affect banks' ability to develop new products for today's discriminating customer. Certainly American finance is rich and diverse enough to run Fairtrade bank accounts.