Redlining 2021: Banks are denying financial services based on ‘morality’

A disturbing trend has developed in which banks are declining to work with entire industries based on the desires of activists. Some of these industries that have been rejected by banks in recent years include private prison operators, gun makers and oil and gas companies. These decisions all followed pressure from progressive campaigners, but if the trend continues it could lead to discrimination and debanking of controversial or disliked industries of all kinds. This is not in America’s best interest, and this is why the government should adopt a proposed new regulation to stop it. 

Banks are creating a new version of redlining, this time against legal industries, for political and ideological reasons and blaming it on vague risks to the banks’ reputations. Now, the Acting Comptroller of the Currency has proposed a regulation, based on the Dodd-Frank Act, that would make it illegal for banks to use category-based risk evaluations to deny access to financial services. This may be the last chance to protect the American economic system from overarching political grievances.

Take the energy industry, for example, which desperately needs this rule to avoid catastrophe for the United States. Six of the largest U.S. banks already have committed not to fund new exploration and production projects in the Arctic. In fact, oil companies are not pursuing new Arctic drilling, but the bank policies seem like a foreshadowing of more to come, and that could lead to real problems. 

Debanking fossil fuel firms could lead to a disastrous energy shortage in the United States. We already are seeing dangerously low investment commitments for new exploration from energy firms hit hard by historically low oil prices. These companies must spend money on exploration and production projects now to ensure that we have sufficient energy in the future. Even if we continue to expand renewable energy production at high rates, we will still need fossil fuels for power and for industrial production. Despite what activists say, if we want to maintain our current lifestyle, let alone improve the circumstances of developing countries, we will need oil and gas for many years to come.

Moreover, denying oil firms access to financial services or financing based on anything other than financial considerations could trigger a national security crisis. Without access to U.S. banking or U.S. capital, the exploration and production of American oil and gas assets could be taken over by firms with foreign banking services or by foreign energy companies tied directly to foreign (sometimes antagonistic) governments.

In more general terms, banks are incapable of making qualitative judgments based on notions of morality. A situation in which banks refuse service based on possibly ephemeral perceptions of morality and societal good is a divergence from the open and generally capitalist system to which we have strived since our nation’s founding. Notions of morality and societal good are often not long-lasting. What a bank or society sees as virtuous today may be deemed wicked tomorrow, and vice versa. Today, banks may wish to refuse service to industries that make certain products or refine certain natural resources. 

Without this regulation, banks tomorrow may choose to refuse service to parts of the news media thought to favor certain political parties or to industries with large numbers of minority-owned businesses. Any decisions about whether certain industries, trades or business practices should be curtailed must be left to the people, which means to their representatives in the legislature. As a highly regulated industry itself, it is appropriate that the banking industry be prevented from acting as moral arbiters in place of the people and the democratic process.  

Ellen R. Wald is a senior fellow at the Atlantic Council’s Global Energy Center, and president of Transversal Consulting, a global energy and geopolitics consultancy. She is the author of “Saudi, Inc.,” a history of Aramco and how the Saudi royal family controls this multitrillion-dollar enterprise.