In her memoir, former first lady Melania Trump reveals that she was abruptly dropped by a bank with which she had a long-standing financial relationship. She also discloses that her son, Barron, was blocked from opening an account at the same bank, the name of which she does not reveal.

It’s unclear from the memoir if the bank harbored concerns about the legality of her deposits or if bank associates were motivated by animus against the Trump family since banks are not required to alert customers about either.

At least, Melania thinks the refusal to open an account for Barron was driven by political discrimination.

Banks, like other private businesses, can refuse service to would-be customers — whether for reputational risks, financial risks or compliance concerns.

However, there is a growing sense that financial institutions are being “nudged” by state regulators to act in line with political priorities.

Debanking is an alarming problem in the banking industry: financial institutions refusing services for political reasons to individuals, companies or organizations.

The relationship between a firm’s discretion, preference and behind-the-scenes governmental pressure on financial firms has grown more intertwined since the 2008 financial crisis.

After the 2008 crash, many laws and regulations were introduced worldwide, such as the Dodd-Frank Act and Basel III, respectively, increasing regulatory scrutiny on banks’ risk management and corporate governance practices.

Most notoriously, the 2013 “Operation Choke Point” targeted specific industries, such as firearms and ammunition manufacturers, by pressuring banks to cut off financial services.

The initiative received blowback and revealed how government regulatory power can be misused to limit financial access. More recently, regulators have pressured banks to deny financial services to crypto-related businesses in what is being called Choke Point 2.0.

Debanking is a bipartisan concern. Earlier this year, Sen. Elizabeth Warren and other prominent Democrats sent a letter to the J.P. Morgan Chase CEO expressing concern that the firm was disproportionately closing accounts belonging to Muslim Americans and other minority groups.

Since the 1990s, the Bank Secrecy Act has required financial institutions to file “Suspicious Activity Reports” when they observe potentially illegal activities. The reports can be filed for many activities, from large cash transactions to dealings with countries and their nationals that the government deems high-risk.

Indeed, “Know Your Customer” rules — a policy dropped as a formal regulatory requirement due to public outcry but still informally pushed by regulators — demand that banks treat their customers as objects of suspicion or face significant penalties. It’s no surprise banks serve the interests of the regulators before those of their customers, as regulators can shut them down.

Lawmakers are aware of the problem and have introduced bills to curtail regulators’ overreach. In 2021, the Protecting Access to Credit for Small Businesses Act aimed to prevent federal agencies from pressuring financial institutions to deny services to legal businesses.

Similarly, in 2019, the Financial Institution Customer Protection Act sought to prevent federal regulators from ordering or pressuring financial institutions to terminate customer accounts without a material reason, essentially preventing debanking based on reputational risk alone.

Although neither bill became law, they show that some legislators are interested in preventing regulators from influencing a bank’s right to associate, or not associate, with their customers.

In September, Sen. Mike Lee, R-Utah, introduced the Saving Privacy Act.

The bill’s “One-pager” contends that America has “an Orwellian financial security state that provides little meaningful contribution to preventing crime while simultaneously eroding Americans’ constitutional rights.”

The bill is a step in the right direction. Although it doesn’t directly go after debanking, it does repeal the Bank Secrecy Act’s mandate that banks file suspicious activity reports, which could be a factor in a bank’s decision to boot a customer.

A financial institution may terminate a relationship with a client for many legitimate reasons. When tensions arise, banks should be allowed to take appropriate actions to manage risk and protect their other customers.

However, if debanking stems from external political pressures, veiled pressures from regulators, or even precaution by banks because of the direction of regulation, then there is clearly a need for reform.

Congress should examine how regulators disrupt genuine risk assessment and ensure that banks aren’t co-opted by the state into becoming enforcers of political conformity.

Patricia Patnode is a research fellow at the Competitive Enterprise Institute. She wrote this for InsideSources.com.