Debanking is a maddening process that presents significant financial hardship to its victims. A banking customer is returned their banked money and told their accounts are closed. No reasons are provided nor is there an appeals process. Customers are left without access to basic economic activities like depositing checks, processing digital transactions including debit cards and issuing payments on loans and bills.

Anger and frustration with debanking are understandable, as some believe financial institutions may do away with business that doesn’t fit a certain political agenda. However, the proposal before the Idaho Legislature in Senate Bill 1027 may make matters worse for banks and their customers. SB 1027 attempts a heroic defense of victimized banking customers, but it attacks the wrong enemy.

Who is the real enemy? The language of SB 1027 targets the largest financial institutions with assets over $100 billion, alleging that only the big banks practice debanking. But in reality all banks face the same federal legislation that would require them to debank certain customers. Idaho’s SB 1027 started off as one of the broadest debanking proposals in the nation. A recent amendment provided more safeguards for banks to allow debanking in the case of unlawful actions by customers.

In no way is debanking an issue that needs to be ignored, but policies making banks the enemy are fruitless endeavors. Banks use debanking as a risk management tool, protecting their operations from the financial repercussions of fraudulent and criminal activities, financially risky customers, or the wrath of federal regulators. Banks are a heavily regulated industry, with a 2016 Government Accountability Office report showing that “fragmentation and overlap” in the system has created confusion.

With over 15 regulating agencies, a significant gap has been created in coordination and transparency in the banking industry. In a recent presentation from Brian Moynihan, CEO of Bank of America, he said there are “100-plus regulators in our building every day.”

This gap is the playground of federal unelected bureaucrats furthering political ideologies into the banking regulatory process. With examples under the Obama and Biden administrations of weaponizing debanking against political opponents. Senate Banking Committee Hearing Chairman Tim Scott, R-S.C., said: “It is incredibly alarming and disheartening to hear stories about financial institutions cutting off services to digital asset firms, political figures, and conservative-aligned businesses and individuals. The message is crystal clear: No regulator, and no bank, is above the principles of fairness and market access.”

The historic federal apathy and stalling on anti-debanking legislation motivated states like Florida and Tennessee to adopt their fair access laws. These laws prohibit banks from denying, canceling, suspending or terminating services to customers based on political opinions, religious beliefs, non-quantitative factors and social credit scores. Idaho’s SB 1027 follows a similar structure to Tennessee and Florida.

Federal regulators have expressed concerns that these state-level fair access laws will undermine federal regulations that prevent criminal activity. These new laws raise preemption concerns of federal law over state banking laws. However, over 10 states proposed anti-debanking legislation in 2024 and Idaho is trying to do it again.

Idaho’s Transparency in Financial Services Act (SB 1027) is the product of years of federal apathy. Understandably, Idaho lawmakers want to protect Idahoans from debanking practices, but SB 1027 complicates an already murky issue without going after the real culprit. First of all, there is little evidence that debanking practices are actually occurring in Idaho and adding this policy would hinder the ability of financial institutions from managing financially risky customers to protect their business.

Testimony supporting SB 1027 mistakenly blames the financial institutions as the cause of debanking, where research and recent federal testimony reaffirms debanking is a result of federal regulations. Stacey Satterlee of the Idaho Bankers Association said: “It is simply not the case that a bank would debank or exit a customer based on their connection to a specific industry or their political affiliation. We feel that this bill goes against free market principles and invites government overreach into business.”

In our current political climate, with a sympathetic federal executive and Congress, now is not the time to add to the complexity of banking regulations. Federal changes need to include: reforming the Anti-Money Laundering Act to reduce the reliance on debanking; fixing bank examinations to prevent regulators from weaponizing debanking; and adjusting the limit for Currency Transaction Reports to inflation from $10,000 to $75,000, reducing required filings by 90%.

Yes, political debanking needs to end, but the change needs to happen at a federal level, not with a patchwork of state responses.

Madi Clark | The Center Square

Madi Clark is a Senior Policy Analyst for the Mountain States Policy Center, an independent research organization based in Idaho, Montana, Eastern Washington and Wyoming. Online at mountainstatespolicy.org.