By William M. Isaac and Stephen T. Gannon
April 9, 2025 3:06 pm ET
President Donald Trump before signing an executive order at the White House in Washington, March 31. Photo: leah millis/Reuters
The Trump administration is trying to reform bank regulation. Many of its executive orders restore due process, fairness and transparency to the banking rules, but like all executive orders they can be reversed by the next administration. To sustain these improvements, Congress should codify them into legislation.
In March, Sen. Tim Scott (R., S.C.) led the way by introducing the Financial Integrity and Regulation Management, or FIRM, Act. It would eliminate the vague term “reputational risk” as an element by which regulators might prevent banks from offering accounts to disfavored, though legal, businesses or people. Congressional action is needed because debanking has been resistant to reform. The Justice Department’s Operation Choke Point, initiated in 2013, aimed to investigate risky practices by financial institutions—and ended up debanking people and entities the Obama administration didn’t like. Last month, President Trump condemned the practice as “lawless” and “a disgrace.”
We have criticized this ugly practice in testimony before congressional committees. Operation Choke Point was a dangerous program that led to debanking of legitimate small businesses. Having the government decide which businesses and people a bank may serve has a chilling effect on the financial services industry. Debanking deprives lawful businesses of the financial oxygen they need to survive. If passed, the FIRM Act will eliminate the practice, we hope permanently.
But there is a bigger problem at the root of the issues the FIRM Act addresses: bank regulation generally has fallen victim to excess subjectivity and regulators’ personal views. That can be fixed by thoughtful legislation. Here is where to begin:
First, substantially reform or eliminate the management (“M”) part of the non-statutory Camels rating system for banks. (The acronym stands for capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk.) Much like “reputational risk,” the M rating has become subjective and lost its coherence. The management component of Camels evaluates a bank’s leadership unconnected to any financial risk and is therefore prone to flaws arising from excess subjectivity. Evaluating management as a standalone component distracts examiners from their core work of analyzing a bank’s objective safety, soundness and stability.
The Federal Reserve reported last year that two-thirds of America’s large banks aren’t well-managed in one or more key areas of risk and governance. However, those same banks enjoy record levels of capital and liquidity and are making billions from investments in new technology. That can’t all be luck. Clearly, the “not well managed” rating has become a largely meaningless statement of opinion.
Second, introduce legislation implementing the administration’s executive orders. Notably, the underlying policy for Executive Order 13892 is to require that regulatory agencies provide procedural safeguards “above and beyond those that the courts have interpreted the Due Process Clause of the Fifth Amendment to the Constitution to impose.” Adding more due process to bank supervision would create certainty, clarity and—most important—fairness.
Third, amend the Congressional Review Act to punish agencies that don’t submit rules to Congress as mandated by statute. The law clearly says that rules not submitted Congressional review and analysis can’t take effect. Today, however, the law is only enforceable by Congress, and not by those who are regulated, and therefore the most affected. Regulated parties should be empowered to raise the absence of a Congressional Review Act submission as a complete defense for noncompliance. This would create an incentive for agency compliance with the law.
The Trump administration has shown a stronger commitment to expanding due process in bank supervision than any White House in recent history. We urge Congress to give these reforms a strong and enduring legislative foundation.
Mr. Isaac, chairman of Secura/Isaac Group, is former chairman of the FDIC. Mr. Gannon is a partner at Davis Wright Tremaine LLP.
Source (Archive)
April 9, 2025 3:06 pm ET
President Donald Trump before signing an executive order at the White House in Washington, March 31. Photo: leah millis/Reuters
The Trump administration is trying to reform bank regulation. Many of its executive orders restore due process, fairness and transparency to the banking rules, but like all executive orders they can be reversed by the next administration. To sustain these improvements, Congress should codify them into legislation.
In March, Sen. Tim Scott (R., S.C.) led the way by introducing the Financial Integrity and Regulation Management, or FIRM, Act. It would eliminate the vague term “reputational risk” as an element by which regulators might prevent banks from offering accounts to disfavored, though legal, businesses or people. Congressional action is needed because debanking has been resistant to reform. The Justice Department’s Operation Choke Point, initiated in 2013, aimed to investigate risky practices by financial institutions—and ended up debanking people and entities the Obama administration didn’t like. Last month, President Trump condemned the practice as “lawless” and “a disgrace.”
We have criticized this ugly practice in testimony before congressional committees. Operation Choke Point was a dangerous program that led to debanking of legitimate small businesses. Having the government decide which businesses and people a bank may serve has a chilling effect on the financial services industry. Debanking deprives lawful businesses of the financial oxygen they need to survive. If passed, the FIRM Act will eliminate the practice, we hope permanently.
But there is a bigger problem at the root of the issues the FIRM Act addresses: bank regulation generally has fallen victim to excess subjectivity and regulators’ personal views. That can be fixed by thoughtful legislation. Here is where to begin:
First, substantially reform or eliminate the management (“M”) part of the non-statutory Camels rating system for banks. (The acronym stands for capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk.) Much like “reputational risk,” the M rating has become subjective and lost its coherence. The management component of Camels evaluates a bank’s leadership unconnected to any financial risk and is therefore prone to flaws arising from excess subjectivity. Evaluating management as a standalone component distracts examiners from their core work of analyzing a bank’s objective safety, soundness and stability.
The Federal Reserve reported last year that two-thirds of America’s large banks aren’t well-managed in one or more key areas of risk and governance. However, those same banks enjoy record levels of capital and liquidity and are making billions from investments in new technology. That can’t all be luck. Clearly, the “not well managed” rating has become a largely meaningless statement of opinion.
Second, introduce legislation implementing the administration’s executive orders. Notably, the underlying policy for Executive Order 13892 is to require that regulatory agencies provide procedural safeguards “above and beyond those that the courts have interpreted the Due Process Clause of the Fifth Amendment to the Constitution to impose.” Adding more due process to bank supervision would create certainty, clarity and—most important—fairness.
Third, amend the Congressional Review Act to punish agencies that don’t submit rules to Congress as mandated by statute. The law clearly says that rules not submitted Congressional review and analysis can’t take effect. Today, however, the law is only enforceable by Congress, and not by those who are regulated, and therefore the most affected. Regulated parties should be empowered to raise the absence of a Congressional Review Act submission as a complete defense for noncompliance. This would create an incentive for agency compliance with the law.
The Trump administration has shown a stronger commitment to expanding due process in bank supervision than any White House in recent history. We urge Congress to give these reforms a strong and enduring legislative foundation.
Mr. Isaac, chairman of Secura/Isaac Group, is former chairman of the FDIC. Mr. Gannon is a partner at Davis Wright Tremaine LLP.
Source (Archive)
