“Debanking” Creates Legal Risk for Banks

In an opinion article published in the Wall Street Journal this week, Jay Rogers, President of Alpha Strategies Investment Consulting, argues that the recent elimination of reputational risk from US bank supervision has left banks legally exposed for past debanking decisions.

In April, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) issued a final rule removing reputational risk from bank supervision, which came into effect on June 9. The following day, it was reported that the US Attorney’s Office for the District of Columbia had subpoenaed JPMorgan Chase, Bank of America, and Wells Fargo over whether their decisions to close customer accounts had violated federal law.

An earlier OCC review found that the largest supervised banks had restricted services to nine specific industries between 2020 and 2023. Comptroller Jonathan Gould called banks’ debanking policies an “unfortunate” misuse of “their government-granted charter and market power.” Rogers traces the practice to Operation Choke Point, the Justice Department’s 2013 fraud-prevention initiative, which resulted in regulatory guidance that drove banks to withdraw services from specific sectors. The mechanism, he argues, was consistent: using regulatory discretion to make disfavored activity expensive enough “that the private institution does the discriminating for you.” 

With the reputational-risk defense gone, Rogers argues, attention turns to bank boards. He contends that a board may have breached its duty of care if it simply “adopts a compliance posture without independently documenting the underlying risk,” a theory that has never been tested in court in this context. “Someone will test that theory now,” he concludes, “and my money is on the Justice Department to get there first.”