Recent headlines have spotlighted the phenomenon of “debanking,” where financial institutions close customer accounts due to perceived reputational risks. This conversation has recently resurfaced as part of broader discussions related to changes in how regulators will assess reputational risk during bank examinations, including potential legislative action that would “combat debanking.” The Financial Integrity and Regulation Management Act (FIRM Act) has been introduced in both the Senate and the House and would address debanking risk factors by removing subjective factors in the bank examination process.
Corporate treasurers should view this news with an information seeking lens and take time to conduct a review of your current banking relationships. As legislation moves its way through Congress, it’s important you proactively assess if your banking partners are a good fit for your organization. Beyond risk mitigation, ensuring your banking partners are values aligned is just good business – your deposits should be kept with a bank that supplements your corporate goals, and does not work against them.
Understanding Debanking
Debanking refers to the involuntary closure of bank accounts, often without detailed explanation, based on the institution’s assessment of reputational or regulatory risks associated with the customer. While initially affecting sectors like cryptocurrency, the scope has broadened, prompting scrutiny from policymakers and industry leaders. Public figures, political figures, and even businesses have been impacted by alleged “debanking.”
However, it is important to note that banks do have the right to refuse customers based on current supervisory guidelines and their organization’s risk tolerance. Simply put, you do not have the right” to a bank account. However, regulators should be assessing risk based on objective, and not subjective factors. Moreover, subjective supervisory guidelines shouldn’t be used to provide rationale for refusing service to customers. There are over 4,400 FDIC insured financial institutions in the US, and depositors can work with experts like Ampersand to find their best fit partner.
Implications for Corporate Depositors
For corporate entities, debanking can pose a risk to operational continuity and financial planning. The sudden loss of banking services can disrupt cash flow, payroll, and vendor payments. Moreover, aligning with a banking partner that shares your organization’s values is increasingly important, as 88% of financial professionals note a growing demand for values-based banking products.
To err on the side of caution and mitigate debanking risks, consider taking the following steps:
- Assess Alignment: Ensure your bank’s mission and values resonate with your organization’s ethos. Are you an eco-conscious company? Does your bank share those values or are they engaged in significant business with, for example, the oil and gas industry?
- Diversify Relationships: Maintain accounts with multiple institutions to reduce dependency on a single bank. As part of any sound cash management strategy, deposits over $250,000 should be managed via a network of banks – to ensure full deposit insurance coverage. This also ensures you have access to a bank, when you need one.
- Conduct Due Diligence: Regularly review your bank’s policies and public stances on issues pertinent to your industry. Working with an experienced cash management partner with a wide network of established banking relationships can help your organization find an aligned fit.
In an era where reputational considerations influence banking relationships, corporate treasurers must proactively evaluate and align with financial institutions that support their operational needs and organizational values.
Have a Question? We’d love to hear from you and work with you to find the right banking partner for your organization.
