Debanked: When Political Bias Trumps Financial Judgment

INTRODUCTION

Government-driven debanking causes a business or individual to lose their banking privileges with a financial institution and compromises their ability to complete critical transactions (e.g., paying a child’s school tuition or facilitating payroll). The practice creates a de facto blacklist of people and organizations that have lost access to banking services and have significant difficulty regaining access to banking.

Debanking can be understood as federal regulators taking advantage of vague and overly broad regulations to advance their political agenda by trying to direct capital to and from certain businesses and individuals. Broad regulations allow regulators’ decisions to potentially be made, not on quantitative financial terms, but instead on political motivations. Further, decisions are often provided to banks in informal and purposefully vague terms. Banks aggressively internalize and operationalize the guidance they receive because, if a bank is perceived to be out of compliance, it risks steep penalties, including multi-billion-dollar fines and even criminal liability.

As Deputy Treasury Secretary Michael Faulkender has stated, “Our financial regulatory agenda must include a fundamental refocusing of supervisors’ priorities… that focuses on material risk taking, rather than box checking or subjective reputational issues. There is perhaps no better recent case study for this point than the bank failures in spring 2023. A careful review of those bank failures underscores how centering supervision on management and other governance matters can distract examiners and banks’ risk managers from the real risks to safety and soundness. The associated mission drift can lend itself to political ends, as we saw with the focus on climate risk and the debanking of disfavored industries” (U.S. Department of Treasury, 2025). Addressing the problem of debanking involves ensuring regulators are focused on financial risks to the banks.

The Root Cause of Debanking

In 2011, federal regulators began issuing informal guidance encouraging banks to consider “reputational risk” associated with their current and prospective clients (FDIC, 2014). Reputation risk is the risk arising from negative public opinion (FDIC, 2008). Such considerations are inherently subjective. That subjectivity gives regulators great latitude; that, in turn, allows regulators biased against certain industries (such as gun manufacturers or cryptocurrency firms) to grade those industries as too risky, warning banks against doing business with them.

Neither the Constitution nor any Congressional statute grant powers to the regulators to decide which lawful businesses deserve access to banking services. And yet, through vague terms like “reputational risk” and the implicit threat of audit or enforcement action, regulators have coerced financial institutions into becoming the enforcement arm of an ideological agenda.

The Impact of Debanking

Debanking creates uncertainty and hardship. In a nation governed by laws, the practice of legal coercion through regulatory discretion is antithetical to the American system of justice.

Ultimately, debanking is not just an economic problem, but a constitutional one. When federal officials use unofficial “guidance” to achieve what Congress never authorized, they violate both the spirit and letter of the law. The solution is to excise power from the regulators, and that begins with narrowing their discretion.

The Role of Banking Regulators in Debanking

Banks are heavily regulated and can only operate when in good standing with the regulators. Banking regulators don’t merely influence bank operations; in reality, regulators can direct and control bank activities. President Trump underscored this point in June 2025 when he explained that “the regulators control the banks. It's not the president of the bank. The president of the bank is far less important to a bank than a regulator and a regulator can put that bank out of business” (Adebayo, 2025).

Banks are regulated through a patchwork of state and federal agencies, depending on the bank and its charter. These federal agencies include the Federal Reserve (the Fed), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Financial Crimes Enforcement Network (FinCEN). Nationally chartered banks are regulated and supervised by the OCC while bank holding companies, which own or control banks, are regulated and supervised by the Fed. Additionally, the FDIC supervises and examines all banks with FDIC-insured deposits.

The Inception and Rise of Debanking

The Bank Secrecy Act

The tools of debanking are rooted in the Bank Secrecy Act (BSA) of 1970, which imposed regulations for how private banks and financial institutions report information to the federal government. The law was created to prevent money laundering and fraudulent financial activity by requiring U.S. banks to record all financial transitions, both foreign and domestic, in addition to providing financial documentation for transactions that were larger than $10,000.

The earliest cases of government-driven debanking can be traced back to early 2011, when the U.S. Justice Department (DOJ) unsealed an indictment and civil complaint against executives at PokerStars, Full Tilt Poker, and Absolute Poker (also known as Ultimate Bet). Known as “Black Friday,” the Justice Department alleged that the executives of these online platforms had defrauded players hundreds of millions of dollars (U.S. Attorney’s Office, Southern District of New York, 2011). The DOJ froze the assets and domains of all PokerStars and Full Tilt Poker’s U.S. accounts in an attempt to return lost funds. It took many individuals nearly a decade to recover their losses.

Operation Choke Point

In the wake of failed firearm legislation, the federal action to debank continued with “Operation Choke Point” in 2013, which was an initiative authorized by the DOJ under the guise of investigating financial institutions believed to be conducting business with “firearm dealers, payday lenders, and other companies believed to be at a high risk for fraud and money laundering” (U.S. Attorney’s Office, Southern District of New York, 2011).

While the Trump Administration took executive action to end Operation Choke Point in 2017, federal legislation was not passed codifying its termination or preventing subsequent government-led debanking initiatives. The House of Representatives introduced the Financial Institution Customer Protection Act of 2017 to limit similar future programs, but the bill died in the House, leaving the door open for future administrations to overturn the Trump Administration’s executive actions.

Fair Access Rule

In 2020, the Trump Administration proposed a rule through the OCC known as the “Fair Access to Financial Services” rule that required banks with over $100 billion in assets provide financial services to all customers on equal terms. The rule attempted to prohibit the denial of banking services to individuals and businesses based on factors like reputational risks, which was a key justification in debanking individuals and businesses with Operation Choke Point. The Fair Access to Financial Services rule never went into effect, as the Biden Administration quickly dismissed it in early 2021.

Following the reversal of the Fair Access rule, the federal government wasted no time re-imposing Choke Point policies on the banking and cryptocurrency industries. In early 2022 the FDIC sent a memo to banks, directing them to “pause” current services with cryptocurrency companies (FDIC, 2025). Building upon that memo, the Board of Governors of the Fed, the FDIC, and the OCC issued a joint statement in early 2023 stating that cryptocurrency and stablecoin-assets presented a “heightened liquidity risk to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows” (Board of Governors of the Federal Reserve System et al., 2023).

In early May of 2025, Vice President J.D. Vance declared at a Bitcoin cryptocurrency conference that Operation Choke Point 2.0 had been terminated by the Trump Administration, building upon the pressure created by a coalition of over a dozen Attorneys General to ensure the end of debanking (Matos, 2025; Montana Department of Justice, 2025). This sent a clear message of support for open financial access within the U.S. financial sector.

Policy Solutions

While the vice president’s declaration represents a positive shift for ending debanking, that progress could be overturned by a subsequent administration. A more permanent solution is needed, and the authors have five specific recommendations below. Each offers Congress an opportunity to prohibit banks from making decisions based on politics and provide consistent policy solutions across all 50 states and territories.

1. Remove Reputational Risk

The Senate Banking Committee recently passed the Financial Integrity and Regulation Management (FIRM) Act which now awaits a vote by the full Senate (United States Senate Committee on Banking, Housing, and Urban Affairs, 2025). The FIRM Act (and its House companion bill, which passed out of committee in May 2025 with bipartisan support) would remove the subjective criteria of “reputational risk” which bank regulators use to evaluate a financial institution (U.S. Congressman Andy Barr, 2025). Instead, financial regulators would rely entirely on objective criteria to assess financial soundness.

At a February 2025 Congressional hearing, Senate Banking Chair Tim Scott pressed Fed Chairman Jerome Powell if he would commit to working with the Banking Committee to end debanking, to which Chair Powell replied that he was “happy to make that commitment” (United States Senate Committee on Banking, Housing, and Urban Affairs, 2025). Shortly thereafter, the FDIC, OCC, and Federal Reserve publicly announced they would not use reputational risk in their regulatory frameworks (Office of the Comptroller of the Currency, 2025). Legislative action is critical to codify these regulatory changes.

2. Take the “M” out of CAMELS

Policymakers should restrict the subjective grading of financial institutions by regulators by removing the “M” in the CAMELS evaluation standard, which the FDIC uses to rate banks’ overall financial health: “Capital adequacy,” “Asset quality,” Management,” “Earnings,” “Liquidity,” and “Sensitivity to market risk.” The “M” is the FDIC’s subjective assessment of the competency of bank management; if a regulator thinks management is banking with a category of businesses the regulator deems risky, it can downgrade the bank’s score and even go so far as to revoke a bank’s charter. Ending the “M” in the rating system, like in the FIRM Act, would go a long way toward removing regulators’ subjectivity and potential biases, keeping the focus on financial criteria.

3. Establish a Federal Fair Access Standard that Puts Banks–Not Bureaucrats–in Charge of Running Their Business

Policymakers should establish a federal Fair Access standard to prohibit financial institutions from making business decisions for political reasons. This standard would ensure banks make decisions based on independent business judgements, and not because of pressure from federal regulators. Ultimately, the lack of uniform guidelines creates potential risks to Americans and the banking system and can fuel frivolous litigation and lawsuits that benefit the tort lobby more than bank customers.

Establishing a Federal Fair Access standard would also end the need for states to develop separate debanking legislation that further complicates banking operations with a patchwork of inconsistent and conflicting state laws. It would be far preferable for states to support a fair and uniform federal standard that removes politics from the equation and enables banks to operate most efficiently.

4. Require Written Customer Notification

Much of the debanking occurs through informal guidance, including verbal guidance; banks, being in the business of reducing risk and maximizing returns, are incentivized to treat even the most informal and non-binding guidance with the force of law. Ending or severely limiting informal guidance adds needed and objective constraints and certainty to bank regulation.

Bank regulators should abide by due-process principles in bank supervision, and all supervisory guidance should be documented and submitted in writing. Regulators must operate within the boundaries of the Congressional authority granted through statute and adhere to the Administrative Procedures Act. Banks should be required to submit in writing notification to their customers of the reason for their debanking with any reasonable constraints due to security and confidentiality issues. The scope of allowable communication could be narrowly prescribed by Congress or regulators to afford bank customers a chance to avoid an outright shutdown of their banking privileges without notice. If a customer poses a potential risk to the bank or financial system, removing his banking privileges may be acceptable. However, if a customer’s business is simply disfavored by unelected bureaucrats or politicians, debanking is unacceptable.

5. Modernize Antiquated Anti-Money Laundering Laws and Know Your Customer rules.

America’s Bank Secrecy Act and Anti-Money Laundering (AML) requirements worsen the problem of politicized debanking. Outdated rules established in the 1970s can make innocuous contemporary transactions appear criminal, often forcing banks to close accounts on the basis of legitimate transactions. This is especially true for cash-heavy businesses, charities and non-profits, as well as for digital asset and money services businesses, including cryptocurrency. What’s worse, when banks close accounts based on these outdated rules, they are often legally prohibited from informing their customers as to why they are losing access to their accounts.

Applying decades old rules to the modern economy harms hardworking Americans. The Office of the Comptroller of the Currency has the authority, today, to make simple changes that will help ensure AML rules are working as intended – to prevent financial crime – and not to fuel unnecessary debanking. As Deputy Treasury Secretary Michael Faulkender has shared, “Treasury is currently exploring ways to streamline [Suspicious Activity Report] SAR reporting, including by improving the form itself, which will be beneficial for law enforcement and national security agencies, as well as financial institution filers” (U.S. Department of Treasury, June 2025).

Conclusion

Whether the result of politically driven regulators abusing their authority or bad policies, this administration and Congress have an opportunity to dramatically curb the practice of government-driven debanking across the country through federal action. Doing so involves reducing subjectivity and instituting these changes into law.