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Commentary By Charles W. Calomiris

You May Be in a Risky Business if Regulators Find It Distasteful

Economics Finance

Obama’s FDIC targeted payday lenders, among others, due to ‘personal moral judgments.’

Imagine you have a thriving business and one morning you get a call from your banker explaining that he can no longer service your accounts. You try to open an account at another bank but are unable to do so. The bankers all tell you the same story: Regulators have told them that they should no longer serve you, and if they continue to do so they will face significant regulatory penalties—even though you’ve done nothing unlawful.

That’s what happened to many business owners as the result of an Obama administration policy called Operation Choke Point. In 2011 the Federal Deposit Insurance Corp. warned banks of heightened regulatory risks from doing business with certain merchants. A total of 30 undesirable merchant categories were affected, including purveyors of pornography or racist materials, gun and ammunition dealers, firms selling tobacco or lottery tickets, and payday lenders.

In 2012 the FDIC explained that banks with such clients were putting themselves at risk of “unsatisfactory Community Reinvestment Act ratings, compliance rating downgrades, restitution to consumers, and the pursuit of civil money penalties.” Other FDIC regulatory guidelines pointed to difficulties banks with high “reputation risk” could have receiving approval for acquisitions.

The FDIC went with particular fervor after one of these “risky” industries: payday lending. In 2014 a report by the House Committee on Oversight and Government Reform unearthed internal FDIC emails that voiced intent to “take action against banks that facilitate payday lending.” According to the report, the FDIC didn’t go after payday lending on the merits. Instead, the committee concluded that “senior policymakers in FDIC headquarters oppose payday lending on personal grounds,” and that FDIC’s campaign against payday lenders reflected “personal moral judgments” rather than legitimate safety or soundness concerns, putting it “entirely outside of FDIC’s mandate.”

In September 2015, the FDIC’s inspector general issued a report substantiating the House committee’s judgments. It found that FDIC staff had been working closely with the Justice Department to identify banks’ relationships with payday lenders.

It is rather comical that regulators would use the excuse of regulatory risk management to punish banks. Banks are in the business of gauging risk and have every incentive to....

Read the entire piece here at The Wall Street Journal.


Charles W. Calomiris is the Henry Kaufman Professor of Financial Institutions at Columbia Business School, a professor at Columbia University’s School of International and Public Affairs, an adjunct fellow at the Manhattan Institute

This piece originally appeared in The Wall Street Journal