The Volokh Conspiracy
Mostly law professors | Sometimes contrarian | Often libertarian | Always independent
In what seems to be a retreat from its Operation Choke Point initiative, the FDIC has announced new regulatory guidance that instructs banks to judge their relationships with their customers on a case-by-case basis, rather than refusing to provide banking services to entire categories of industries. From the Press Release:
The Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Letter today encouraging supervised institutions to take a risk-based approach in assessing individual customer relationships, rather than declining to provide banking services to entire categories of customers without regard to the risks presented by an individual customer or the financial institution's ability to manage the risk.
The FDIC also reinforced the agency's policies on managing customer relationships to examiners and other supervisory staff. Financial institutions that properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of customer accounts or individual customers operating in compliance with applicable laws. FDIC examiners must provide notice in writing for any case in which an institution is directed to exit a customer relationship.
The move comes in response to growing complaints that Operation Choke Point was choking off access to banking services for legitimate businesses. According to documents released last summer by the House Oversight Committee, the FDIC's prior position (at least with respect to payday lenders) had been that if companies really were legitimate, then the burden was on them to prove it. But this latest guidance suggests that in practice examiners and banks were treating it as a categorical rule.
A recent column in the American Banker argues, for example, that Operation Choke Point (or some knock-on variation) has been leading banks to close the bank accounts of many churches and religious charities. One church's lawyer speculates that the reason for her client's account being closed is that it receives a large percentage of its contributions in cash. It is not clear whether this is specifically the result of the federal government's Operation Choke Point or some similar state initiative.
In addition, last summer the FDIC retracted its "hit list" of suspect industries.
So where does this leave Operation Choke Point? The Washington Times (where I first came across the story) argues that it effectively ends Operation Choke Point. And if the FDIC guidance is taken at face value, that would seem to be the case-it hardly seems revolutionary for the FDIC to say that banks should determine whether to provide services based on the risk profile of each customer, not the "reputation risk" of entire industries. In that sense, it is just stating the obvious.