Is There an Epidemic of “Debanking”? BPI Weighs In
Ever since venture capitalist Marc Andreessen told Joe Rogan that he personally knew dozens of tech entrepreneurs who had been debanked, the issue has become a political football for the left and right. Banks find themselves caught in the middle, between examiners' requirements and customer outrage. A new paper from the Bank Policy Institute argues the solution will require regulatory reform.
By David Evans, Chief Content Officer
The report: The Truth About Account Closures
Source: Bank Policy Institute
Why we picked this report: The firestorm that erupted after Andreessen’s appearance on Rogan – and his assertion that the debanking was part of a campaign by the Biden administration against "their political enemies and then to their disfavored tech startups" — put debanking on the front pages, and led to counter accusations that a "right-wing elite" was making it a political rallying point.
Executive Summary
U.S. banks face significant challenges in balancing their role in preventing financial crimes with providing services to legitimate businesses. According to a recent paper from the Bank Policy Institute, current regulatory requirements and examination practices create incentives for excessive suspicious activity reporting and overly broad "high-risk" customer designations.
This has led to the phenomenon known as "debanking," in which legitimate businesses lose access to banking services. The issue affects various sectors, from crypto companies to traditional businesses, driven by banks’ fear of regulatory penalties and reputational risk. The issue recently exploded on social media and elsewhere, thanks to an episode of the Joe Rogan podcast in which venture capitalist Marc Andreessen said that he personally was aware of roughly 30 start-up founders who had been debanked.
Is debanking on the rise and, if so, who is at fault? BPI argues that, while banks are technically free to serve any legal business, the current examination regime effectively gives regulators significant control over banks’ customer relationships, often resulting in reduced services to law-abiding customers despite their creditworthiness.
How should individual institutions now think about their own policies and procedures when denying or curtailing services to individuals or businesses? How much leeway do you really have?
Key Takeaways
- Banks filed 4.6 million Suspicious Activity Reports (SARs) last year, driven by a regulatory framework that BPI claims heavily incentivizes over-reporting while providing immunity from liability for filing.
- The $10,000 threshold for Currency Transaction Reports, set in 1970, has never been adjusted for inflation even though it would be equivalent to about $80,000 today.
- Failing to close accounts deemed "high-risk" has resulted in penalties of hundreds of millions or even billions of dollars, creating strong incentives for banks to terminate relationships preemptively.
- Examiner pressure and regulatory scrutiny effectively create barriers to serving certain industries, even when such services are legally permissible.
What we liked about this report: BPI incisively spotlights both the regulatory burden and offers examples of how examiners can both directly and indirectly pressure institutions to deny or throttle services to otherwise legitimate businesses.
What we didn’t: As an advocacy group for the banking industry, BPI focuses more on proposed regulatory and legislative solutions to the debanking phenomenon, while offering little guidance to institutions on how to proceed until such reforms are implemented.
The Regulatory Burden of Financial Crime Prevention
Banks in the United States carry a heavy burden in their role as frontline defenders against financial crimes. While their mission to prevent activities like drug trafficking and terrorist financing is crucial, BPI argues that the current regulatory framework creates inefficiencies that ultimately harm legitimate businesses.
Under the Bank Secrecy Act, banks must build detailed customer profiles, monitor activity continuously, and file Suspicious Activity Reports (SARs) whenever illicit activity is suspected. The system incentivizes over-reporting since banks face no penalties for filing too many SARs but can face severe consequences for missing even a single suspicious transaction.
This asymmetric risk has led to the filing of 4.6 million SARs in the past year alone, creating an enormous administrative burden with questionable effectiveness in catching actual criminal activity. While this designation may be appropriate in some cases, such as when dealing with potential fentanyl trafficking risks, it often results in excessive compliance burdens. The cost of maintaining these high-risk accounts includes continuous documentation requirements and increased exposure to regulatory penalties.
This has led banks to terminate relationships with entire categories of customers, including cryptocurrency companies, payday lenders, firearms dealers, and even foreign embassies. The penalties for failing to close a problematic account can reach hundreds of millions or even billions of dollars, making it financially impossible for banks to justify maintaining many customer relationships regardless of their actual risk level.
The Examination Regime and Account Closures
The examination process itself has become a powerful tool for regulators to influence bank behavior, often in ways that go beyond statutory requirements. While regulators officially state that banks "are neither prohibited nor discouraged" from providing legal banking services, BPI reports that the reality is more complex. Examiners can effectively veto bank activities through "supervisory non-objection," a process that requires banks to demonstrate extensive controls before engaging in certain services.
Recently released supervisory letters show how examiners use this process to pressure banks to "pause" activities or exit certain business lines entirely, even when these activities are legally permitted. The opaque nature of the examination process makes it difficult for banks to challenge these decisions or for customers to understand why their accounts are being closed.
The current regulatory regime has far-reaching consequences beyond individual account closures. BPI says banks are increasingly hesitant to innovate or serve new industries due to regulatory uncertainty. This is particularly evident in the cryptocurrency sector, where banks face additional scrutiny and compliance requirements despite the legal status of the industry.
The system has also created banking deserts in certain regions and industries, forcing businesses to seek alternative financial services that may be more expensive or less regulated. This outcome runs counter to the goal of maintaining a transparent, well-regulated financial system.
Reform Opportunities and Future Directions
The Anti-Money Laundering Act of 2020 offered a potential pathway for reform by emphasizing the need to focus resources on higher-risk activities while reducing the burden for lower-risk customers. However, subsequent regulatory proposals have failed to fulfill this promise.
Future reforms could include updating the outdated $10,000 currency transaction reporting threshold, revising SAR filing requirements to focus on genuinely suspicious activity, and creating clearer guidelines for managing high-risk accounts without automatically requiring their closure. Banks need a more balanced regulatory framework that allows them to serve legal businesses while effectively combating financial crime.
Editor’s note: This article was prepared with AI language software and edited for clarity and accuracy by The Financial Brand editorial team.
