A pedestrian passes the seal of the Office of the Comptroller of the Currency (OCC) displayed outside the organization’s headquarters in Washington, D.C., U.S., on Wednesday, March 20, 2019.

Andrew Harrer | Bloomberg | Getty Images

The Office of the Comptroller of the Currency finalized a rule on Thursday that Wall Street’s largest banks have strongly opposed since its proposal in November. The OCC’s Fair Access to Financial Services rule was finalized a day after current OCC head Brian Brooks announced his resignation. The rule seeks to require banks to provide quantitative metrics proving the risks that lead them to deny services to potential clients.

While some conservative think tanks and segments of industries that feel threatened by issues over which banks have increasingly denied services including lending — such as in energy, arms manufacturing, and agriculture — supported the rule, Brooks’ last move on his way out the door is not just opposed by the largest banks, but faced widespread opposition from legal scholars and environmental, social and governance experts. Critics have referred to it as the “gunmaker’s and oil drillers rule.”

The rule was proposed in November and public comments were due in by Jan. 4, a timeline that is shorter than the standard one of 60 to 90 days and that critics contend resulted in a poorly written rule which seeks to score political points rather than create effective bank regulation. The OCC indicated that it had considered more than 35,000 public comments that came in by the Jan. 4 deadline, which was a level of public interest in the proposed rule that had led several OCC watchers to say it was unlikely the rule could be finalized before the change in administration. Only eight business days later, the OCC has finalized the rule.

The OCC declined to make an official available for comment when contacted earlier this week about the proposed rule, saying it was not providing any comments during the review period, though a spokesman said many critics mistake the rule as prohibiting banks from discontinuing service and credit to risky business. “That’s wrong. The proposal requires large banks to show their work and conduct objective risk assessments of individual customers regarding the provision of services consistent with previous guidance issued by the Office of the Comptroller of the Currency,” he wrote via email.

It sent CNBC the formal rulemaking on Thursday without further comment.

The OCC said in the release that the rule codifies more than a decade of OCC guidance stating that banks should conduct risk assessment of individual customers, rather than make broad-based decisions affecting whole categories or classes of customers, when provisioning access to services, capital, and credit. The rule applies to the largest banks with more than $100 billion in assets that “may exert significant pricing power or influence over sectors of the national economy.”

The rule requires covered banks to make products and services available to all customers in the communities they serve, based on consideration of quantitative, impartial, risk-based standards established by the bank.

 “We are disappointed the Acting Comptroller chose to fast-track the final approval of this hastily conceived and poorly constructed rule on his last day in office. The rule lacks both logic and legal basis, it ignores basic facts about how banking works, and it will undermine the safety and soundness of the banks to which it applies,” said Bank Policy Institute president and CEO Greg Baer in a statement, which represents the largest banks in the U.S. “Its substantive problems are outweighed only by the egregious procedural failings of the rulemaking process, and for these reasons it is unlikely to withstand scrutiny.”

The American Bankers Association, which represents the broader banking industry, called the rule “arbitrary and capricious” in a comment letter to the OCC filed last month and said it lacked “clear statutory authority, its inconsistency and potential conflict with longstanding and widely accepted risk management and supervisory practice.”

The rule will face multiple challenges

Legal challenges are expected.

University of Iowa law professor Christopher Odinet, who has studied the OCC, said courts will be asked to overturn the rule on the basis that OCC didn’t have the authority to issue it, or even if it did, OCC violated the Administrative Procedures Act (APA) by doing it so quickly (issuing the final rule 10 days after receiving thousands of comments suggests the agency did not consider the comments as the law requires). 

A new OCC head could move to repeal the rule when appointed by President-elect Biden — current COO Blake Paulson is now acting head — which would require going through the APA process and could take time, but is a potential way to proceed. Or Congress could repeal it within the next few months under the Congressional Review Act by a simple majority vote in both houses. 

 “In any case, this rule isn’t long for this world,” Odinet said, who described the OCC under Brooks as “constantly overreaching and aggressive.” 

The rule, which is scheduled to take effect on April 1, speaks to the intersection of political and corporate philosophies that are changing and dictated by new factors such as environmental, social and governance (ESG) risk factors.

Climate is an example of where these tensions are playing out. While other major regulators including the Federal Reserve and Commodities Futures Trading Commission have been more vocal about the systemic risks that climate change poses to the market, the OCC move could subject banks to legal challenges if they deny financial services based on climate risks that cannot be precisely quantified. At a broader level, any risk assessment a bank uses to deny service to a customer which cannot be quantified could result in legal action based on the OCC rule.

The industries that voiced a position on the rule were widespread, and some of the comments do reveal the extent to which more industries fear a socially responsible movement that will disadvantage them, for example, the National Association of Egg Farmers, which expressed the concern in a comment letter that the animal rights’ movement could lead to its inability to access financing in the future.

But banking and ESG experts say the rule goes too far in undercutting the basic working model of risk assessment in the financial industry.

“This rule says banks should not be in the business of assessing risk. That is what banks do every day,” said Steve Rothstein, head of the Ceres Accelerator for Sustainable Capital Markets, a sustainability investment advocacy group. “The ones that do well make healthy loans, and we are seeing clearly a trend for more awareness and engagement with ESG,” he said.

As an example, most major Wall Street banks have said they would not lend to oil drillers in the Arctic region. When the Trump administration recently put up for sale Arctic drilling leases, there were few bidders. Among the reasons, though not the only reason, was banking industry reluctance to finance the market, though the relative lack of interest does speak to how the broader market views the opportunity.

“Only two small oil companies applied. The banking market said it is not a good market,” Rothstein said, but he added that under the new OCC rule a bank would find it more difficult to deny lending based on overall concerns about the oil industry. “You couldn’t just say it is not a line of business you want to be in. It is an outrageous last ditch attempt. The broader issue of how we measure risk, quantify climate risk, is an important one, but this particular rule is a distraction.”

As regulators and corporations move more rapidly to incorporate ESG factors, the banking sector’s decision to support or deny service to an industry such as energy will factor in carbon emissions and how society confronts climate change. The same has been true in the arms manufacturing market, where many banks are reluctant to lend to firearms companies, and political backlash has been fierce in some conservative circles.

Smaller banks fear the OCC impact

Ken LaRoe, who is currently fundraising among investors for his new Climate First Bank in Florida and has a long history in sustainable banking, said the new OCC rule frightens him at a time when he is seeking investors for his new business.

He has run banks that have an exclusionary list of industries they would not bank, such as mining, slash and burn developments, pornography, guns and energy.

If the OCC rule becomes the type of interagency guidance which all banks worry they must follow, it will introduce “perverse reputational risks,” LaRoe said. He recently raised $20 million from investors, many aligned with ESG investing. “Every time I do a pitch they want to know what returns will be, sure, but they what to know what we’re doing to prevent a global crisis, asking, ‘who will you bank or not bank?'”

“I thought this OCC rule was nutty as hell when it was first proposed and just more Trump BS,” LaRoe said. “The bankers I’ve talked to think it is just crazy. It’s just playing to the base. A publicity stunt.”

But it could have significant consequences. He said any impact on smaller and regional banks — which the ABA noted in its comment letter could not be ruled out — could require lenders to run balance sheets that are less safe.

“To have to take deposits from industries which are disfavored, and not industries for the long term or in the best interest of our community, that is mandating a less safe bank,” LaRoe said.

The ABA issued a statement on Thursday from Hugh Carney, its senior vice president of prudential regulation, urging that the rule not take effect, and stating that “in addition to short-circuiting the traditional rulemaking process and failing to take into account thoughtful comments from thousands of stakeholders, we believe it is a mistake for the OCC to mandate which businesses banks must service. Banks are in the best position to manage their risks and maintain their safety and soundness.”

The future societal role of banks

The role banks play in society is distinct from that of many other industries, and that has led political forces to opposing views in the new era of ESG-led decision making. Free markets think tank Mercatus Center said in a comment letter on the OCC rule that since banks are given a higher level of state protection by the government than other industries, they have a responsibility to support a broad range of businesses.

Critics find the fact that a free market policy group is saying banks should not be free to make their own business decisions puzzling.

“There is no way the government should limit who we do and do not do business with,” LaRoe said “There is an un-American aspect to it that should make Republicans and free enterprisers glom all over it.”

In fact, some of the fiercest resistance among regulators for business and investment decisions based on ESG factors is coming from the libertarian, free enterprise policy world represented by Mercatus. SEC Commissioner Hester Peirce, who previously worked at Mercatus, is among the most vocal critics of ESG’s quantitative limitations.

Banks are chartered, which can be a long process unlike anything other corporations go through, and they are subject to constant ongoing supervision by regulators with the ability to control them in ways different from other businesses, but critics of the rule say that does not mean banks should lack the ability to make business decisions on clients, or that those decisions are not in the best interest of their market, customer base and society.

Mandating who a bank should or shouldn’t lend to flies in face of safety and soundness, which flies in face of what banks do.

Ken LaRoe, Climate First Bank founder

The question about what banks owe to society, and what regulators like the OCC and politicians view as the public function, is not going away regardless of this rule’s eventual lifespan. Banks serve a public policy function through their decisions when it comes to existential threats like climate change, which will factor into their decision making.

LaRoe said the vast majority of the Fortune 500 are in agreement that carbon emissions and climate risks need to be reported and audited, and while even just five years ago it was more difficult to quantify the investment potential of ESG, it has become compelling. “The next generation will move the needle as far as ESG. The dinosaurs all will be gone at some point.”

While some risks can be quantified, reputational risks often cannot be, making this rule difficult to see as anything more than a political ploy by Brooks on his way out the door to appease political interests on the right, Odinet said.

“They can make decisions that align with corporate values and that reflect reputational risk introduced by doing business in certain sectors,” he said. “That’s just effective risk policing and corporate value governance. … Let’s say the Proud Boys want to open accounts at a bank and started taking out loans to fund activities. There is a reputational risk there. How can you engage in a quantitative mathematical analysis to show reputational risk? Certain reputational risks are novel and don’t have historical data sets to draw on in the underwriting analysis. Good self governance at a bank can’t be reduced to a mathematical formula.”

The rule implements language included in Title III of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, which charged the OCC with “assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction.”

Critics say using language adjusted in the financial reform after the 2008 crash intended to protect disadvantaged communities and prevent discrimination as a way to protect corporations is a misleading application of the law, and runs counter to basic bank operations. 

“Mandating who a bank should or shouldn’t lend to flies in face of safety and soundness, which flies in face of what banks do,” LaRoe said.

While the new OCC rule can be viewed as stemming from a belief banks should not be picking the winners and losers, critics say the market indicates the winners and losers and banks assess risks based on those broader trends.

And if a coal plant can’t get financing and is out of business in a decade, “I have no sympathy for them,” LaRoe said. “This is the way capitalism is supposed to work. This is an industry that is dying industry and the whole concept of propping it up through private enterprise is absurd. Those who will die, will die because of market forces.”

This story has been updated to reflect the fact that the OCC estimates 35,000 comments on its rule were submitted by stakeholders.

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