Redlining 2021: Banks Refuse Financial Services on the Basis of “Morality”
A worrying trend has developed in which banks refuse to work with entire sectors based on the wishes of activists. Some of these industries that have been shunned by banks in recent years include private prison operators, gun manufacturers, and oil and gas companies. These decisions all followed pressure from progressive activists, but if the trend continues, it could lead to discrimination and the suppression of banks from controversial or hated industries of all kinds. It’s not in America’s best interest, and that’s why the government should pass a new proposed regulation to stop it.
Banks are creating a new version of redlining, this time against legal industries, for political and ideological reasons and by imputing vague reputational risks to banks. Now the Acting Comptroller of the Currency has proposed a settlement, based on the Dodd-Frank Act, which would make it illegal for banks to use category risk assessments to deny access to financial services. This may be the last chance to protect the American economic system from general political grievances.
Take the energy industry, for example, which desperately needs this rule to avert disaster in the United States. Six of America’s largest banks have already committed not to finance new exploration and production projects in the Arctic. In fact, the oil companies are not pursuing new drilling in the Arctic, but banking policies seem to foreshadow more to come, and that could cause real problems.
Cutting the bank of fossil fuel companies could lead to a catastrophic energy shortage in the United States. We are already seeing dangerously low investment commitments for further exploration from energy companies hit hard by historically low oil prices. These companies need to invest money in exploration and production projects now to ensure that we have enough energy in the future. Even if we continue to expand renewable energy production at high rates, we will still need fossil fuels for electricity and industrial production. Despite what activists say, if we are to maintain our current way of life, let alone improve conditions in developing countries, we will need oil and gas for many years to come.
In addition, denying oil companies access to financial services or funding based on anything other than financial considerations could trigger a national security crisis. Without access to US banks or US capital, exploration and production of US oil and gas assets could be taken over by companies with foreign banking services or by foreign energy companies linked directly to (sometimes antagonistic) foreign governments. .
More generally, banks are incapable of making qualitative judgments based on notions of morality. A situation in which banks refuse service on the basis of possibly fleeting perceptions of morality and societal good is a departure from the open and generally capitalist system we have strived for since the founding of our nation. Notions of morality and societal good are often not sustainable. What a bank or a company considers virtuous today can be considered bad tomorrow, and vice versa. Today, banks may wish to deny services to industries that manufacture certain products or refine certain natural resources.
Without this regulation, banks may choose tomorrow to deny services to parts of the media supposedly favoring certain political parties or to industries with large numbers of minority-owned businesses. Any decision as to the necessity of restricting certain industries, certain trades or certain commercial practices must be left to the people, that is to say to their representatives in the legislature. Like a highly regulated industry itself, the banking sector should be prevented from acting as a moral arbiter in place of the people and the democratic process.
Ellen R. Wald is a senior fellow at the Atlantic Council’s World Energy Center, and President of Transversal Consulting, a global energy and geopolitical consulting firm. She is the author of “Arabia, Inc., A story of Aramco and how the Saudi royal family controls this multi-billion dollar company.