Commentary: The OCC Is Right – Banks Have No Right To Politicize Their Lending Practices

This article originally appeared in Forbes on December 10, 2020.

Fiduciary duty requires all money managers, trustees, and advisors to make investment decisions based solely on risk and return. It does not include decisions based on political whim or the political flavor of the day. Twenty-five years ago, it was tobacco companies; today it is a smorgasbord of activist causes, from companies that help defend our nation, to energy, to ammunition.

Fiduciary duty, a more than 1000-year-old concept of loyalty to those who have been entrusted with your property, is now under attack – not just in pension fund and mutual fund management, but also in the banking sector, as major investors threatening to sidestep entire American industries not because of risk and return but for political reasons.

Red-lining entire sectors is not only a violation of duty from a fiduciary perspective, it is also likely illegal, and flies in the face of the free-market principles under which the American banking system is supposed to operate. However, in a necessary first step, the U.S. Office of the Comptroller of the Currency (OCC) issue a Notice of Proposed Rulemaking which would codify the standard that banks must lend based only on the lender’s credit-worthiness (emphasis added) without regard to political or other forms of discrimination.

As detailed by the Wall Street Journal, large-scale banks with more than $100 billion in assets would be required to evaluate the risks of individual customers on a case-by-case basis, and would be barred from red-lining entire industries. According to the OCC, this decision comes in response to bank leadership statements regarding their intention to divest from whole sectors of the economy, usually in response to activist pressure and the ill-defined concept of “reputational risk” to the bank. This is not a right vs. left issue.  Pressure comes from both sides of the political spectrum to divest from certain industries. I have certainly seen religious and other institutions place restrictions on how their money is managed.  Note the key words there are “their money.”  Their money is not your money.  Money managers are entrusted with “their” money to invest with the highest return at a reasonable risk and within the guidelines imposed by the property owner. “Their” guidelines become your guidelines—not the other way around.

The impetus for this new proposed rule stems from guidelines set forth in the Dodd-Frank Act, which charges the Comptroller to ensure “fair access to financial services, and fair treatment of customers” by nationally chartered banks. This law aims to ensure that entire classes of customers are not cut off from services due to the perception of higher risk. The new OCC regulation represents an implementation of this provision of the law by ensuring that entire categories of customers and American industries cannot be terminated writ-large but must be judged on a case-by case basis.

At the end of the day there is no such thing as a risk-free loan, or, in the classic expression of all bond traders, “There is no interest rate too high for too high a risk.” It is the obligation of all banks to manage, not avoid, risk based on both substitutive and quantitative analysis founded on impartial risk management standards. That is the only criteria they can have. The recent proposed rulemaking by the U.S. Comptroller of the Currency is an essential first step in keeping personal political viewpoints out of polluting fiduciary duty.