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BISMARCK, N.D. - As part of its commitment to improve economic opportunity and rebuild the economy, the U.S. Senate held a hearing on fair access to banking. During the hearing, U.S. Senator Kevin Cramer (R-ND) highlighted his Fair Access to Banking Act, a response to the practice commonly referred to as debanking, in which banks discriminate against law-abiding industries and groups by refusing to provide financial services to them.

In preparation for the hearing, Cramer submitted a recent report on debanking released by the Office of the Comptroller of the Currency last week. The report details debanking activities practiced by some of the largest banks in America.

Cramer began his questioning by asking Dean of the University of Wyoming College of Law Julie Hill, a banking and commercial law expert, about her earlier testimony regarding reputational risk, which is sometimes created by rumors and exploited by regulators, creating uncertainty.

"As bad as bad regulation is, bad regulators are worse, and as bad as regulators are, uncertainty is even harder," said Cramer. "And the reality is that reputation comes from rumors and rumors of rumors as much as it does from bad regulation. If we don't put some guardrails on the debanking side, we leave decisions up to a variety of views, political views and otherwise, both in the industry and with the regulators."

Hill described her research, explaining how in a study on reputation risk, it was almost always ancillary to other risky or illegal actions.

"So they find a bank that engaged in money laundering, and they say, 'You shouldn't have engaged in money laundering, because it's illegal, and it causes reputation risk,' or they find a bank that opened unauthorized accounts, and they say, 'You shouldn't open unauthorized accounts, because it's illegal, and it causes reputation risk,'" said Hill. "In those instances, reputation risk isn't really doing anything. We might 100% agree that it exists, but regulators don't need that tool to stop that illegal behavior or that risky behavior."

Hill continued, "Reputation risk becomes troublesome when it acts all on its own. So when it's just reputation risk, when you can't point to a violation of the law or increased financial risk, that's when regulators can use it just to punish people for political reasons. And in that case, it's not doing anything to make the financial industry safer. It's just politicizing the regulators, and that's what's wrong."

Cramer also asked about the mixed signals sent by regulators because of a lack of guardrails. "Some people would submit to you that the regulators are sort of a useful excuse for bankers to do what they want anyway. And I might ask each of you, if you think there's some truth to that, because we're seeing bankers who, on one hand, especially large banks, have said, 'we're never going to do that.' And then, there's a change in the administration. They say, 'we didn't really say that.' And then, of course, they wait later, and then they go with political winds. Do you think it's the banks as much as regulators?"

Hill explained how the secrecy surrounding financial supervision as making "it very easy for both the regulators and the banks to point at the other and cast blame, and we never really know who's telling the truth."

Cramer referred to his Fair Access to Banking Act, which would eliminate the ability of banks to use ambiguous terms such as reputational risk to discriminate against customers and penalize banks for denying services based on anything other than empirical data consistent with the banks' established, impartial risk-management standards. He asked witnesses for their perspective on whether "a penalty, or enforcement mechanism help hold those banks accountable […] and provide for better guidance? […] Does prohibiting debanking imply a mandate to bank?"

Kathleen Sgamma, a Principal at Multiple-Use Advocacy which represents the oil and gas sector, responded by stressing the importance of regulators refraining from encouraging debanking "the biggest issue over the last five years from my industry has been making sure the regulators can't use all these levers. To me, that's the really important part."

Dean Hill concluded by explaining "banks benefit from government supervision and government insurance, which they pay for. So at least in theory, you should be pricing that into your bank model. But the truth of the matter is that there are customers, which it is just difficult to profitably bank. That can be people who overdraw their account or bad credit risks, or it could be marijuana businesses, where the compliance burden is just so high that when you price that into the cost of the account, it becomes prohibitive. I think that there is something of a line between de-banking and being forced to bank, but you've got to be careful about it, because...it will be very difficult, for a bank, to bank some customers."