Is Fair Banking Unfair?

To stay viable, banks need to be able to make choices about creditworthiness. But they need better ways for deciding how.

$100 bills are printed at the U.S. Bureau of Engraving and Printing in Washington on May 20, 2013.
$100 bills are printed at the U.S. Bureau of Engraving and Printing in Washington on May 20, 2013. Mark Wilson/Getty Images

On Nov. 30, the Wall Street Journal editorial board published an op-ed in support of the outgoing Trump administration’s fair banking rule. That rule, designed to prevent big banks from, as the Journal put it, “red-lining” unpopular industries such as those engaged in arctic drilling, private prisons, or firearms manufacturing, was finalized by the acting comptroller of the currency, Brian Brooks, on his way out the door. It is set to take effect on April 1. However, it is subject to the recently imposed regulatory freeze that the Biden administration implemented so that it can review all pending rules.

The rule was promulgated under Title III of the Dodd-Frank Act of 2010, which charges the comptroller with ensuring “fair access to financial services” and “fair treatment of customers.” Although the intention of this portion of the Dodd-Frank Act was to prevent discrimination against minorities and the financially disenfranchised, rather than discrimination against private prison companies and the oil industry, as it is now being used, discrimination is discrimination, right?

Brooks and the Journal editorial board seem to think so. As Brooks himself put it, the rule was “just a nondiscrimination principle.” He added: “We are just saying that if you do offer a service, it has to be made available on equal terms to everybody unless there is a risk issue with that particular person.” In other words, just as banks shouldn’t deny services to potential borrowers because they live in predominantly African American communities, they shouldn’t deny services to firms because they engage in unsavory, unjust, or environmentally damaging practices. Now, under the new rule, to justify their lending choices, banks will have to point to “quantitative, impartial, risk-based standards established by the bank.”

To take Brooks at his word, the Office of the Comptroller of the Currency is simply doing its best to establish a system of nondiscriminatory banking. But that can’t be right. Bankers who don’t discriminate between potential borrowers would have no purpose. The whole point of the banking system is to determine which borrowers are most creditworthy—to discriminate between those projects that will be successful and that will be able to make good on promises to pay loans and those that won’t. In short, the idea of nondiscriminatory banking simply doesn’t make sense.

The fundamental question, instead, is what criteria should be used to discriminate between potential borrowers? And who should get to decide?

The new rule tells bankers how to do their job by specifying the sorts of considerations that banks can and cannot take into account when deciding who to lend to. They can consider quantitative, impartial risk calculations (assuming such tools exist). They cannot consider qualitative factors such as reputational, social, or environmental cost. Unsurprisingly, bankers are largely against the rule, preferring to maintain the power to discriminate between potential borrowers as they choose.

And so, we have a debate between those who think credit should be allocated in the United States by private banks on the basis of quantitative, impartial criteria and those who think credit should be allocated by private banks on the basis of the considered judgment of private bankers. Unbeknownst to most, however, there is a third dog in this fight. This third dog is an advocate of the following view: Credit should not be allocated exclusively on the good graces of commercial banks, regardless. This perspective is developing among a number of bank reformers and innovators.

To name just one, in 2020 the Atlanta-based rapper Killer Mike joined forces with the entrepreneur Ryan Glover and former Atlanta Mayor Andrew Young to launch Greenwood, a fintech company. Inspired by the Greenwood commercial district that developed in Tulsa, Oklahoma, prior to the 1921 massacre of Black residents by white ones, Greenwood, the company, is an attempt to change who is in the good graces of a credit-creating financial institution by changing the makeup of the institution itself. Greenwood is majority owned, managed, and run by Black and Latinx people, and the mobile banking platform self-describes as a “Black owned banking system developed by us, for us.” The company has been designed to promote circulation of money within Black and Latinx communities. Beyond providing financial services to Black and Latinx people, Greenwood will also donate regularly to historically Black colleges and universities, the NAACP, and Black and Latinx businesses.

Meanwhile, proposals for re-creating a postal banking system in the United States abound. Perhaps the most prominent promoter of this idea is Mehrsa Baradaran, who is now being considered to run the comptroller’s office in the Biden administration. Baradaran has proposed reinvigorating and extending the postal savings program that existed in the United States until 1966 in which anyone could open a bank account at their local post office. Her preferred scheme would empower publicly employed, local postal bankers to determine who is creditworthy, presumably with federally determined guidance. This proposal suggests that the federal government should have a more direct say in how to discriminate between potential borrowers.

Finally, a bill introduced in the House of Representatives late in 2020 by Reps. Rashida Tlaib and Alexandria Ocasio-Cortez would permit the federal government to charter public banks—banks that would determine the creditworthiness of potential borrowers and investments by appeal to criteria other than profitability. Such criteria might be those determined by state, local, or tribal governments, as is already the case with the Bank of North Dakota, or the interests of other established social groups. According to the bill, the only thing public banks would not be permitted to support through their practices of credit creation is the fossil fuel industry.

While such banking reform proposals are often seen through the lens of financial inclusion, they are much more than that. They represent a rethinking of how credit is created and disseminated: Determining the creditworthiness of potential borrowers should not be limited to quantitative risk-based calculations or the private judgment of contemporary commercial banks. Instead, taken together, these proposals suggest that social groups, minority and historically oppressed communities, and government at all levels should have a say.

Banks and the comptroller’s office may be arguing over a regulatory rule aimed at establishing nondiscriminatory banking while public banking advocates take no real notice. Nevertheless, these parties are fundamentally engaged in the same task. All three of these groups are offering different answers to one big question: On what basis should we create and disseminate credit? That is the conversation that the United States needs to have frankly, directly, and among all parties.

Leah Downey is a PhD candidate at Harvard and a visiting academic at the Sheffield Political Economy Research Institute (SPERI).