Political Struggle for Control of Banks' Loan Taps Is Back

In recent days, the Trump administration has been trying to disrupt the way progressive activists are increasingly imposing their will on big business: through banks that control the maturity of loans to the economy.

A regulation that could be adopted this week aims to prevent lenders from blackballing companies in sectors opposed by the left by requiring banks to demonstrate that their credit decisions are "based on quantitative, impartial risk-based standards" rather than for political or reputational damage.

The proposed Fair Access to Financial Services Rule (FAFSR) is in response to successful pressure campaigns by environmental groups and congressional Democrats, which culminated in every major U.S. bank refusing to fund drilling projects in the Arctic National Wildlife Refuge (ANWR), despite such drilling with permission from President Trump in 2017.

Bryan Hubbard, a spokesperson for the Office of the Comptroller of the Currency, told RealClearInvestigations that the rule codifies long-standing OCC guidelines on banks' obligation to provide fair access to their services, and will ensure that banks do not "whole categories. customers terminate ".

If the rule is published in the federal register before Trump leaves office, it could be short-lived. Many Democrats are against the measure and have 60 legislative days to pass the rule by simple majority, as stipulated in the Congressional Review Act.

Nonetheless, the Arctic drilling dispute underscores the power of progressive groups to intimidate, flatter, and partner with superpowers to advance their agendas – often beyond the bounds of the legislature. Through boycotts and other pressure campaigns, progressives have sought to induce companies to adopt their social and cultural values ​​on issues ranging from climate change policies to gun control. Firearms dealers, oil producers, moneylenders and workers in other controversial industries have been hindered in their access to capital by these campaigns, which often target the circulatory system of the economy – the banking sector.

Oil companies had worked for decades through traditional channels in Washington – busy lobbying the full press, writing whitepapers, and of course, generous campaign contributions to sympathetic lawmakers – to get permission to drill into the ANWR.

The debate over drilling for refuge, the country's largest wildlife refuge, has been raging since parts of the 19 million acre area were first set aside in 1960 under President Dwight Eisenhower. Twenty years later, President Jimmy Carter signed the Alaska National Interest Lands Conservation Act, which expanded the size of the reserve but opened a coastal plain (called the "1002 area") for oil exploration, subject to prior approval by Congress.

That authorization has proved elusive, as the preservation of the ANWR became a cause célèbre among environmentalists.

However, in December 2017, President Trump signed the Tax Cuts and Jobs Act, which included a provision from Alaska Senator Lisa Murkowski authorizing oil exploration in the 1002 area. The language opened a relatively small portion of the reserve – 2,000 of the area's 1.57 million hectares – for surface development.

Republican lawmakers speculated that the project could generate $ 60 billion in royalties for (Alaska) alone.

As the required environmental assessment process progressed, opponents took action.

In January 2020, a group of Senate Democrats sent an letter to all major US banks, asking them to "stop funding … oil and gas drilling and exploration in the Arctic National Wildlife Refuge" to better prepare the US economy for the growing effects of the climate crisis The letter echoed themes found in later print campaigns conducted by environmentalists such as the Sierra Club and Greater good.

The banks quickly lined up. In February, Wells Fargo announced that it "would not directly fund oil and gas projects in the Arctic, including the Arctic National Wildlife Refuge (ANWR)." UBS pledged it "would no longer provide funding when the stated proceeds go to new offshore oil projects in the Arctic." Citigroup stated that it "would not provide project-related funding for the exploration and production of oil and gas in the Arctic Circle."

On December 1 any major US bank had announced that it would refuse to fund drilling in the region, despite having been approved by Congress for development.

In response, Murkowski and the other members of Congress in Alaska sent a joint letter to Jerome Powell, chairman of the Federal Reserve, in June urging him to take action. The delegation emphasized how the banks in question use "reputation risk" – the risks associated with reputational damage caused by funding politically and morally controversial projects – as a justification for unilaterally denying access to capital to Arctic drills. .

By refusing funding under the guise of reputation risk, lawmakers said wrote, "These (banks) are discriminating against US interests, our economic recovery, and our employees, using significant federal support and benefits."

The regulation proposed by the OCC aims not only to end this deadlock, but also to ensure that other companies "involved in politically controversial but legal" industries are not excluded from capital markets.

The rule's public response period ended on January 4. Commentators from various industries wrote the OCC in favor of the pending regulations.

Richard Brower, the vice chairman of the New York City Fire Department Pension Fund and a board member of the Institute for Pension Fund Integrity, described what he saw as disturbing parallels between the politicization of pension fund management and the politicization of lending decisions.

“Just like with the management of these pension funds,” says Brower wrote, “Banks have also (collapsed) under pressure to terminate contractual credit relationships, not based on business decisions, but rather through activist pressure.

"Unfortunately, there appears to be a trend for large credit institutions to evade their fiduciary obligations, citing 'reputational risk' and concerns about political repercussions in their decision-making."

Richard Lipsey, the chairman of Lipsey LLC, the largest distributor of firearms in the United States, told the OCC that corporate activism and the fallout from Operation Choke Point – the since-abandoned Obama-era effort to get members of & # 39; high- cutting off risk industries, including firearms dealers, from access to the banking system – have made it difficult for companies in his industry to do business.

"Unfortunately, while (Operation Choke Point) is no longer in effect under President Trump," Lipsey wrote, "the financial institutions (firearms dealers) continue to discriminate and systematically try to choose the types of legal products that they tolerate their customers who produce and. sell to law-abiding Americans.

"Operation Choke Point has been effectively privatized, beyond the control of elected officials and the voters they represent."

Congressional Democrats crossed the pending rule. A group of 23 House Democrats wrote a letter to the OCC stating that discrimination as described by Brower and Lipsey is a necessary step towards a safer society.

"(D) the only quantitative risk analysis that would be required by the (FAFSR)," wrote Congressmen, "lowers other material risks, including public safety, to the extent that financial institutions voluntarily chose to adopt a decision-making framework. to reduce gun violence when determining who and how they serve potential customers.

The delegation also noted that the proposed rule "would do nothing to ensure that communities of color are better served by the banking system."

The proposal angered leading bank industry officials, who claim that FAFSR poses an unnecessary burden to lenders. Greg Baer of the Bank Policy Institute, a group representing several of the country's largest banks, wrote a letter to the OCC explaining the & # 39; profound practical implications of (FAFSR) & # 39; and & # 39; the erroneous legal reasoning underlying it & # 39; questioned.

"Under (FAFSR), national banks could no longer take into account the range of factors they traditionally took into account," wrote Baer, ​​"both in the context of applying their own sound risk management practices and meeting the OCC's supervisory expectations. , when deciding whether and how to provide financial services to a customer. "

However, it is unclear whether the banks in question are only applying "their own sound risk management practices" when they refuse to play ball with certain politically controversial borrowers. An OCC investigation revealed that, instead of limiting their discrimination to the realm of credit, "certain banks … are also discontinuing advisory and other services (to potential Arctic drills) unrelated to credit. or operational risk. "

OCC's Hubbard emphasized that banks receive federal deposit insurance and "the privilege of a national license to operate," a license that he says imposes certain obligations on banks. Banks have a duty, Hubbard said, to provide commensurate access to financial services, even for clients involved in legal but politically controversial industries.