Nearly 200 financial institutions have signed-on to the U.N. Finance Initiative’s Principles of Responsible Banking. One of its six core principles is alignment of a bank’s business strategy with, among other things, the Paris Climate Agreement, which has broad implications for the oil and gas industry.
Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo have all pledged to end funding for new drilling and exploration projects in the Arctic, “under increasing pressure from environmentalists and others to limit fossil-fuel lending,” as the Wall Street Journal notes.
Similar decisions have been made regarding other industries unrelated to the Paris Accord or to climate change. Several of the same institutions — as well as others including SunTrust (now Truist) and Bank of America — had earlier announced they would stop lending to operators of privately run prisons, prompted by the attention given to immigration detention centers.
This growing trend concerned the Office of the Comptroller of the Currency (OCC) enough that it decided to weigh in with a proposed rule that essentially says to any national bank of $100 billion and up that is making such decisions: “You can’t do that.”
OCC calls the proposal the “fair access rule.” It doesn’t single out any particular institutions nor the U.N.’s list of principles. But the regulator notes an increasing number of similar initiatives aimed at encouraging or pressuring — depending on your perspective — financial institutions to commit to climate change, sustainability, and other environmental or social targets and agendas, not only by words, but actions.
Banking leaders have increasingly been responding to such forces and not necessarily out of altruism. Numerous surveys indicate consumers say an institution’s perceived morals and ethics play an important role in how they feel about the brand.
“Creating a purpose-driven brand is instrumental in helping companies differentiate themselves in a dynamic marketplace,” observes Ellyn Raftery, Chief Marketing and Communications Officer for FIS. “They need to align their brands and products with larger societal causes that are so important to younger generations.”
If the OCC proposal is implemented, however, financial institutions will face more complicated choices. They will be caught between a rock (public/media/political scorn) and another rock (regulatory enforcement action). Which rock looms larger is hard to say.
What ‘Fair Access’ Rule Would Change
OCC is proposing to codify guidance it has been providing informally for years. The legal foundation of the rule is Title III of the Dodd-Frank Act of 2010, which charges the agency with assuring fair access to financial service, along with enforcing antitrust law. Technically the announcement was a “Notice of Proposed Rulemaking,” which means it’s put out for comment from interested parties.
The due date for comments was Jan. 4, and more than 35,000 comments were received, according to the OCC. Brooks, who resigned as Acting Comptroller in January, released the final rule on Jan. 14, 2021. However, on Jan. 28 the OCC announced that publication of the rule in the Federal Register had been paused. “Pausing publication of the rule in the Federal Register will allow the next confirmed Comptroller of the Currency to review the final rule and the public comments the OCC received, as part of an orderly transition,” OCC stated.
Financial institutions that would be covered by the rule, at least initially, are national banks of $100 billion in assets and up. Such institutions are much more likely to have market power such that if they exited a service, it would either be impossible to obtain that service or the price would be raised in the market, according to the regulator. Importantly, the rule does not apply solely to lending, but includes any banking service — checking, savings, payroll processing, etc.
“The whole point of the rule is that you can’t ‘debank’ a sector,” Acting Comptroller Brian Brooks said during a media briefing announcing the proposal. “You can be in a line of business or not. But if you’re in a line of business, you can’t say I’m making it available to the public except for oil companies or except for agricultural businesses or except for family planning. The core principle here is the right to be treated as an individual, not just as a member of a group.”
An “individual” could be a consumer, but for the most part the rule relates to businesses that a bank would deal with.
Large Banks Changed Policies Surprisingly Quickly
As indicated above, the issue has come up before, notably with banks broadly boycotting money services businesses in 2014 and payday lenders and others as part of Operation Choke Point, an Obama Department of Justice program that was subsequently rescinded.
Brooks said that as the agency looked at the issue in 2020 they were surprised at how widespread it had become. “We found that large banks in a relatively short amount of time had made a change in their banking policies to stop serving several different sectors.” Three segments in particular were oil exploration and drilling on Alaska’s North Slope, long opposed by environmental groups, and coal mining and coal-fired electricity generation.
“When we inquired as to why those things were happening, we found that the reason generally had nothing to do with credit risk, financial risk generally or operational risk in managing those kinds of assets,” said Brooks. Instead, he pointed out, it had to do with a belief on the part of the banks that those industries were inconsistent with things like the Paris Agreement, the Equator Principles or other environmental statements.
Speaking out on such issues is a different matter, however. “If a bank CEO believes that it’s important that the U.S. reenter the Paris Climate Agreement, the CEO should give that speech,” Brooks stated. But limiting or eliminating access to banking services from the bank based on those views, could soon be prohibited.
The proposed rule has already come under fire for being politically motivated. Brooks observed during the briefing, however, that the range of businesses was bipartisan. “We’re not just talking about calls to debank firearms manufacturers or fracking companies. We’re talking about calls to debank independent ATM operators, Planned Parenthood and other family planning organizations.”
Reputation Risk Must be Quantifiable
Brooks was asked during the media briefing if reputation risk was a justifiable reason not to lend to some businesses. He responded in the affirmative, but said that it’s important to define what reputational risk is.
“Reputational risk needs to be something more than the personal opinion of a CEO or the board chair,” Brooks stated. “Like all other kinds of risk that the OCC manages, reputational risk is supposed to be quantified.” And further: “If you can quantify that there’s a reputational risk that will have impact on the business, that would absolutely be a reason” to not do business with certain entities.
A boycott of an entire sector, however, may not be justified by reputation risk, based on other comments Brooks made. He likened the issue to not wanting to serve a disfavored race or gender identity where the argument has been, “My other customers won’t come in if I serve those people at my lunch counter.”
Said Brooks: “Popularity at the moment has never been the touchstone of fairness that I can think of in my lifetime or my parent’s lifetime. … There is a creeping politicization of the banking industry that has the propensity to be very, very dangerous.”
Using the private prison industry as an example, Brooks explained, “I’m not saying that a bank has to lend to all private prisons, but they will have to assess those customers based on their banking characteristics.” And further: “If they do deny customers a service, they must do it on individual risk assessments of that specific customer that are quantified and documented … [not] subjective opinion-based boycotts.”
If eventually published in the Federal register, the new rule would be enforced as part of the regular safety and soundness examination cycle. The agency would develop examination modules to test for compliance.
[This article was updated Jan. 28, 2021]