Private firms are becoming increasingly vocal about public policy issues, and are well within their rights to do it. However problems arise when firms aren’t as “private” as they seem. Take banks—whose business model is uniquely linked to the government — which seek to limit customers’ access to services in the name of corporate social responsibility.
Following the horrific school shooting in Parkland, Florida, Citibank and Bank of America stated they would withhold certain financial services from firearms businesses that do not meet their own requirements about which products should be sold. Additionally, banks are talking about tracking credit card purchases used for firearms, possibly as a precursor to banning them.
{mosads}Whatever your thoughts on the gun debate, it’s worth asking whether banks should be able to use their power in this way.
Banks in the United States are not free-market actors, and their market power — the tool they use to seek change — is largely the product of government policy. As such, is it appropriate to use the power and protection our government grants them to force social change? Or is that best left to our elected representatives and truly private organizations?
Banks enjoy numerous advantages that are the product of government actions. For example, strict banking regulations limit the amount of competition established banks face. Anyone could start up a competitor to YouTube tomorrow; this is not true of a bank. Opening one requires government permission in the form of a charter and federal deposit insurance.
Not only does the law limit competition among banks, it also gives banks significant advantages over non-bank competition. Banks are empowered by federal law to lend nationwide, even as they only have to comply with the applicable laws within their home state. Non-banks like Lending Club or Prosper must either get a license from — and comply with the interest law of — every state they want to do business in, or else partner with (and pay) a bank.
A similar legal dynamic exists between banks and non-bank money transmitters like Western Union and Square. Banks are generally absolved from having to get a license to transfer money in each state they do business in, while non-banks are not. Further, banks can access the payments system maintained by the United States Federal Reserve while non-banks cannot. This gives banks an advantage in money-moving.
The law even gives banks a competitive advantage when it comes to deposits. No one has to stick money in a bank account. We can invest in a money market fund, buy an asset like gold or bitcoin, or just stuff the money in a mattress. But thanks to federal deposit insurance, bank accounts offer customers a level of safety for their savings that non-bank competitors simply can’t match.
Deposit insurance relieves banks of the cost of assuring depositors that their money will be safe, or compensating them for risk in the form of higher interest. This not only protects banks from non-banks but also protects risky banks from more prudent ones. After all, without federal deposit insurance, how many depositors would trust their funds at Citi or Bank of America, both of which were saved by a federal bailout less than a decade ago?
Banks using profits to persuade voters or elected officials to support changes to the law would be one thing. Coercing citizens and firms by cutting access to the financial services banks have been empowered by the government to provide is quite another.
When banks use government-provided market power to force social change, they are effectively acting as a private regulator. However, we did not deputize banks as social regulators, and it’s possible that any number of “controversial” organizations — Planned Parenthood, adult entertainment shops, fast-food restaurants — would lose access to financial services if we allow it to become the norm.
The best option to prevent this potential abuse of power is to make banks compete in a free, or at least freer, market. Congress could lower barriers to entry for new banks, remove regulatory advantages over non-bank competitors, remove federal deposit insurance, and require banks — especially larger ones — to hold more capital to protect against the risk of failure and bailouts. Then banks could wield influence based on their own competence, not government-granted privilege.
Of course, this sounds politically impossible, at least for now. So what then?
Congress could consider imposing a political neutrality requirement on the power it provides banks. Controversy would surely follow: Guns, drugs, abortion, climate, and a host of other issues deeply divide Americans, but we have constitutional processes for determining what a legal and legitimate business is. It should be those processes that determine how government power is used, not the whims of a bank’s management.
Brian Knight is a senior research fellow and director of the Program on Financial Regulation at the Mercatus Center at George Mason University.