Debanking’s Real Culprit: Big Government, Not the Banks

Originally published on Substack. 

President Trump’s new Executive Order on Guaranteeing Fair Banking for All Americans takes aim at “debanking,” the practice of closing accounts for political or reputational reasons. That’s a worthy goal. No one should lose access to basic financial services because of their lawful business or beliefs.

In most cases, banks aren’t waking up one morning and deciding to cut customers for political points. They’re responding to a tangle of Washington regulators, political mandates, and legal threats. The free market isn’t the problem here—big government is. And unless we fix that, even well-intentioned orders like this risk making things worse.

Banks can be considered the middlemen of the economy. They connect people who have money with those who need it—whether it’s to start a business, buy a house, or invest for the future. This matchmaking role helps put resources where they can do the most good, which is exactly what drives growth.

In a true free-market system, banks compete for customers based on service, price, and trust. They make decisions based on profitability and the likelihood that a borrower can repay a loan. That’s the essence of voluntary exchange—what Milton Friedman celebrated as the foundation of prosperity.

But banking today is far from that ideal. It’s one of the most regulated industries in America, overseen by the Federal Reserve, FDIC, OCC, CFPB, Treasury, and state regulators.

Every one of these entities imposes rules—from how much capital banks must hold, to the types of loans they can make, to the interest rates they can charge. Add to that political mandates like ESG and DEI, and you have a system where many lending decisions are made with one eye on the customer and the other on Washington.

This environment set the stage for Operation Choke Point, a program launched under the Obama administration. Regulators used a vague term—“reputational risk”—to pressure banks into cutting off entire lawful industries, like firearms dealers and payday lenders.

The reasoning was political, not financial. And the message was clear: serve these customers and expect trouble from your regulators. Reports suggest similar pressures existed under President Biden.

President Trump’s Executive Order goes after this abuse directly. It bans the use of “reputational risk” in regulatory guidance, orders agencies to strip that language from their rules, and calls for reviews of past cases where it was used to force account closures. Those are good steps.

But the EO also gives the Treasury Department and other agencies new authority to investigate past debanking cases and impose “remediation.” In Washington, that usually means more compliance costs, more reporting requirements, and more penalties. And when banks are already drowning in regulation, new burdens push them to take the path of least resistance—closing accounts not just for illegal activity, but for anything that might draw regulatory attention later.

In a free market, banks have every reason to serve more customers. Closing an account without good reason means losing business to a competitor, and likely losing credibility and other customers. But when the government sets vague rules or threatens costly penalties, banks respond by avoiding any customer that could be seen as risky—politically or otherwise.

Without that government pressure, how much political debanking would really happen? Probably very little, if any. The bigger problem is that the regulatory state has so much control over banking that it distorts the market’s natural incentives.

History offers a striking contrast. In the early 1900s, J.P. Morgan famously organized a rescue of the financial system during the Panic of 1907—without orders from Washington—because keeping the system stable was good for business.

That’s what markets can do when they’re free to operate. Today, by contrast, interest rates are manipulated by the Federal Reserve, lending standards are shaped by thousands of pages of regulations, and credit decisions are warped by political checklists.

If the goal is to protect customers from losing accounts for political reasons, the rules should be simple: a bank should only close an account if the customer violates agreed terms or breaks the law. That’s it. No political nudges from regulators. Just clear, objective standards set by individual banks so customers can pick which ones they prefer.

Beyond that, the real fix is to shrink the government’s role in banking.

That means repealing harmful laws like Dodd-Frank that drove bank consolidation and reduced competition. It means removing ESG and DEI mandates from financial oversight. It means encouraging more competition from community banks, credit unions, and fintech companies so customers always have alternatives.

Prosperity comes from voluntary exchange, not from bureaucrats deciding who can do business with whom. When banks are free to serve customers based on merit, and customers are free to take their business elsewhere, both sides win.

The more we let the market work, the more people will prosper.

Conclusion

President Trump is right to call out politicized debanking. No American should lose access to banking because of lawful business or beliefs. But the real source of the problem is the government’s outsized power over the financial system. Giving that same government more authority to police “fairness” in banking risks making the problem worse.

If we want fair banking for all, the solution is clear: less government, more competition, and simple, objective rules that keep politics out of financial decisions. That’s how we protect both customers and banks—and that’s how we let people prosper.