Book credit

OCC is right, politics shouldn’t determine access to credit

The Office of the Comptroller of the Currency (OCC) is considering a rule (i.e. equitable access to banking services, capital and credit), which would ensure that banks provide equal access to financial services, without discrimination . Such clarification is absolutely necessary.

It goes without saying that banks should not discriminate against potential creditworthy clients who operate in legal sectors. Yet, thanks in part to the growth of environmental, social and governance (ESG) investment and management guidelines, there is a growing trend for this discrimination to occur.

As far as investors are concerned, ESG selects companies on the basis of a wide variety of predefined criteria. Some ESG funds limit their investments to companies that meet specific environmental or social criteria, such as cleantech companies. Other ESG funds are, for all intents and purposes, broad-based funds that simply reject targeted investments. Applied to companies, ESG criteria impose operational guidelines that compliant companies are expected to follow. For some supporters of ESG, the criteria include the payment of a sufficient minimum wage, for others, this includes minimizing a company’s greenhouse gas emissions.

By following these criteria, companies and investors are expected to be able to “do well by doing well”. Whether applied to investors or businesses, ESG raises troubling questions.

One, which is relevant to the proposed OCC rule, is that the arguments supporting ESG suffer from a fundamental incongruity. Promoters, who are often outside the organization, pressure companies and investors to implement ESG strategies. These same advocates also claim that ESG programs and investments will increase profits. These two statements are contradictory.

In all other parts of the business, companies and investors do not need outside entities to force them to engage in actions that will increase their profits. It is the responsibility of the management of the company, which will be replaced if it fails to maintain sufficient profitability.

It follows logically that companies and investors who maximize their profits will implement ESG programs and strategies when they increase their profits. No additional advocacy or pressure is required. This means that ESG advocacy is only necessary for programs and strategies that do not increase profits.

Regarding the rule proposed by the OCC, banks are under pressure from ESG activists to give up serving politically disadvantaged industries such as energy companies, arms manufacturers or private prisons. However, if these industries are not profitable, then no pressure to discriminate against them is required.

For example, banks did not discriminate against video stores as their lending to the industry dried up. The assessment of the business fundamentals clearly showed that the business model was no longer relevant. The same logic applies to these disadvantaged industries. If their business model were not strong, as many activists claim, no pressure to discriminate against them would be necessary – banks would naturally shift their loan portfolios to other more profitable sectors.

Pressure to discriminate against these industries is only necessary because these industries are economically viable. Therefore, the issue is no longer whether these industries are financially healthy, but the political desires of ESG activists targeting these industries.

Giving in to these political pressures will entail significant economic costs.

First, when pressure from ESG activists pushes banks to discriminate against profitable sectors, these institutions make lending decisions based on political correctness rather than economic fundamentals. When lending decisions are based on political considerations rather than financial strength, failures usually ensue. The $ 2.6 billion taxpayers lost when the government allocated investment capital to 19 politically-favored but bankrupt green energy companies illustrates the risks.

The same risks to the US economy as a whole will emerge if policies do not actively block a similar politicization of bank lending decisions. In short, allowing the political trends of the day to discriminate against profitable industries will ultimately hurt our future growth and prosperity.

It is important to note that not allowing the political fads of the day to deny credit to entire sectors does not mean that banks should not take political or legal risks into account when making individual lending decisions. These considerations may be relevant. However, such considerations should be assessed through a typical impartial loan approval process, and not through blanket discrimination against a legal industry.

Second, using political justifications to deprive viable businesses of banking services inflicts financial and economic damage directly on those industries. If they are largely sidelined by the banking sector, then their operations will be adversely affected, leading to job and income losses far beyond disadvantaged industries.

Third, ESG activists bypass the political process when they use banks to punish underprivileged industries. The aim of the legislative process is to enable the representatives of the people to take important political decisions. Typically, activists push banks to discriminate against disadvantaged industries because there are important political issues that need to be resolved.

How these issues are handled will have a significant impact on important social policies such as the appropriate response to global climate change, whether additional Second Amendment restrictions are to be imposed or whether state and local governments are to be given the flexibility to use private prisons.

Deciding on these issues through state legislatures and Congress creates an open process where all relevant issues can be considered. Not only is it inappropriate for individuals to use the banking system to bypass the proper legislative process, it hampers our ability to resolve important policy issues in a sustainable manner.

A core value of our federal banking regulations should be to ensure access to financial services without discrimination. The proposed rule advances this goal by ensuring that bank lending decisions are based on economic fundamentals rather than political considerations. As a result, the rule will help the banking sector play its vital role in providing essential credit services that foster an economic environment conducive to growth and prosperity.

Margarita W. Wilson

The author Margarita W. Wilson