Guns and Banks: New Laws & Policies
When gun manufacturers or dealers face civil liability for misuse of firearms, the liability costs eventually shift to investors (shareholders or owners), liability insurers, commercial lenders, or creditors (the debts they own now carry more risk), and indirectly to future customers, who may face price increases. Financial institutions (which I will call “banks,” though this is an imprecise colloquialism) can have two of these roles in absorbing the liabilities, as their investment funds may hold stock in gun manufacturers or retail chains, and as their commercial lending units may have secured or unsecured business loans or lines of credits extended to manufacturers or dealers.
Civil liability for gun manufacturers can therefore pose losses for banks that invest in these companies or lend to them. Financial relationships with gun manufacturers can, in theory, result in additional losses if the banks face consumer boycotts, negative scrutiny from the media, or informal shunning by potential commercial partners, such as vendors or co-branded credit cards with large retailers. Potential losses from boycotts, negative publicity, and loss of corporate partnerships are collectively known as “reputational risks” in the financial industry. On top of these potential losses, banks can face more scrutiny from bank regulators (more scrutiny often turns into higher legal costs) due to their higher risk portfolios, and in some cases, fines for regulatory noncompliance or even loss of their charter. In other words, civil liability for gun manufacturers can, depending on its frequency and severity, cast a long shadow over parts of the banking industry. And there is a long tradition of writers raising moral concerns over the profit motives and money trail of the arms industry, especially the military-industrial complex – the 1934 classic Merchants of Death by H.C. Engelbrecht and F.C. Hanighen is one early example, as is the 1933 book Cry Havoc! by Beverley Nichols.
Legislators and regulators have begun to intervene to address the relationships between financial institutions and gun manufacturers or dealers. This is occurring at the federal and state levels, and these legal interventions run in two different directions – some attempting to protect the gun industry from banks wanting to divest, and others encouraging banks to divest. At the same time, a cultural trend of corporations being more socially and environmentally self-conscious – simultaneously urged by consumer boycotts and pressure from investors or shareholders, has led a number of large companies, including some financial institutions, to limit or sever their ties with the gun industry.
Bank Announcements: After the horrific mass shooting at a high school in Parkland, Florida in 2018, several large financial institutions (JP Morgan, Citi, Bank of America, etc.) announced plans to curtail lending to manufacturers of certain guns, or at least to require such borrowers to restrict sales of certain products or to younger customers. The press releases framed these pledges as a reaction to the tragedies themselves. It is possible, however, that such announcements were in response to public pressure (media scrutiny and threats of boycotts by groups like Guns Down America), or pressure from state treasurers or federal bank regulators – a topic to which I will return below.
Federal Regulators and Congress: A few federal agencies regulate different aspects of the banking industry – the Federal Reserve Board (FRB), the Office of the Comptroller of Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the relatively new Consumer Finance Protection Bureau (CFPB). In late 2020 (after the November election), the Trump-appointed Acting Director of the OCC, Brian Brooks, proposed a rule to prohibit banks from “discriminatory” lending practices (this would have applied to both the firearms industry and the fossil fuel industry). A new Acting Director took over in January 2021, after the inauguration, and within a week shelved the proposed rule, citing the need to await a new Senate-confirmed Comptroller of the Currency (we are still waiting on this).
A bill proposed in Congress in 2021, S.563 (the Fair Access to Banking Act), would similarly prohibit financial institutions from denying loans or other financial services to would-be borrowers based on their industry; it does not mention the gun industry specifically, but rather applies to any lawful businesses. Introduced by Sen. Kevin Cramer (with 26 Republican co-sponsors), it would simply prohibit banks from discriminating against industries based on their products or services; penalties for noncompliant banks include treble damages. In other words, a bill introduced in Congress would do the same thing that the proposed-but-shelved OCC rule would have done.
Both the moribund OCC rule and the proposed Fair Access to Banking Act were, at least in part, a reaction to a previous inter-agency initiative called Operation Choke Point. There are competing histories about what happened with Operation Choke Point, and the extent to which it forged a rift between the national banks and the gun industry.
Operation Choke Point originated with a small task force within the Department of Justice during the Obama Administration. These DOJ officials coordinated with the federal agencies that regulate banks in an effort to “choke off” the financing of certain industries connected with various illegal activities – but Operation Choke Point manifested itself differently through these agencies. The FDIC took steps to discourage banks from financing Ponzi schemes, consumer fraud, and (mostly, it turned out) payday loan providers. The FDIC had a special focus on “Refund Anticipated Loans” (RAL), which are high-interest, mostly nonbank loans based on an individual borrower’s anticipated tax refunds. The FDIC framed its concerns as being about these being risky investments for banks, either due to risks of default or “reputational risks.” The connection to the gun industry arose from a journal article. The FDIC’s Division of Risk Management Supervision publishes a journal, Supervisory Insights, to promote sound principles and practices for bank supervision. One article from the time period included a table that listed thirty types of “merchants associated with high-risk activities,” and two of these thirty were “ammunition sales” and “firearm sales.” Other industries grouped with guns and ammunition sales on the table were “escort services,” “Ponzi schemes,” and “racist materials.” Note that this was neither a regulation nor an official “guidance document” under the Administrative Procedure Act – but bank officers read the article, and the gun industry reacted strongly.
There followed a series of court challenges (some by banks, some by payday lenders), Congressional investigations, and an audit/report by the Office of Inspector General. The lawsuits and Congressional hearings painted the FDIC as the primary culprit in an alleged example of organized government overreach. The OIC audit, however, found little or no involvement by the FDIC in Operation Choke Point (though it acknowledged a few FDIC officials had stepped out of line), and no evidence that any FDIC actions had harmed these industries. Several gun dealers testified before Congress that banks denied them loans based on their industry being blacklisted by the FDIC. The FDIC settled its last lawsuit over Operation Choke Point (by payday loan companies) in 2019, though the program ended with the end of the Obama Administration.
The OCC managed to deny publicly any involvement in Operation Choke Point (and largely avoided Congressional recriminations), though bank executives from the era remember the OCC pursuing the Operation aggressively. The OCC, in contrast to the FDIC, approached Operation Choke Point as an anti-money laundering initiative; it pressured banks to cut ties with numerous client businesses it believed were often involved in money laundering for drug cartels and terrorist organizations. Like the FDIC, however, gun dealers were on its blacklist as clients for banks under its purview, as well as liquor vendors (far more numerous than gun dealers, if one includes restaurants and hotels), ATM operators, and so forth. It was a co-defendant in some lawsuits with the FDIC, but it continues to deny its involvement, contrary to stories told by bank execs from the time.
New State Laws: In 2021, the Texas state legislature enacted SB 19 (2021), which forbids state entities or Texas municipalities from contracting with banks (for financing, bond issues, etc.) that “discriminate” against firearm or ammunition manufacturers. Note that in 2021, the Texas legislature also enacted SB 13, a statute that imposed similar restrictions for banks that boycott or divest from the fossil fuel industry. Banks stepping away from the gun industry is part of a larger movement of corporate social consciousness, which includes environmentally friendly investing or lending practices, and sometimes includes divestment from Israel. News coverage of the gun statute, however, connected it with the public announcements of the banks in the prior two years. The Texas Attorney General announced a policy of strict enforcement for the statute (the statute requires banks to obtain state AG approval of their compliance certification prior to the awarding of any contracts – see here).
Also in 2021, the Wyoming legislature passed HB 0236, which similarly punished banks that “discriminate” against gun manufacturers or dealers. Instead of cutting those banks off from municipal bond work in the state, this statute created a cause of action for those claiming to be victims of such discrimination (i.e., gun dealers denied a loan based on their line of work), for which they can seek treble damages. Several other states also have recently enacted or pending bills that would sanction banks for their divestment/boycotts from the fossil fuel industry or Israel, including Arizona and Kansas.
Before Texas enacted its statute, Louisiana, via its State Treasurer and relevant committees, excluded JP Morgan from a major municipal bond contract due to its anti-gun-industry policy. This action by officials in Louisiana was a point of discussion in the Texas legislative hearings about SB 19 before its enactment.
Some states have gone in the opposite direction. Some state pension funds had already taken steps, often via state treasurer’s policy or advisory boards, to divest state pensions from the firearm industry (as did some large cities like Philadelphia). Again, this is part of a larger trend of environmental, social, & governance (ESG) policies by large pension funds and some banks.
In 2018, Connecticut’s State Treasurer went a step further, announcing a policy of more rigorous pension fund divestment from the firearms industry (the state Treasurer has some oversight of municipal pensions as well as those on the state level), and now requires banks to disclose ties with the gun industry to get contracts (i.e., loans or lines of credit for cities or state agencies, and bond work). For news coverage, see here and here. The Treasurer’s Office will “weigh” a financial institution’s gun policy as one factor, among many, when approving public contracts for banking and financial services. Connecticut appears to be the first state to adopt such measures. The Treasurer’s announcement of this policy connected it with potential civil liability for gun manufacturers:
From an investment perspective, civilian gun manufacturers face significant legal and reputational risks that have an impact on company profitability and long-term shareholder value. Often a volatile investment, these securities present unnecessary financial and business risks associated with the products manufactured. The U.S. Supreme Court’s decision to allow the families of Sandy Hook victims to proceed with their claims against Remington Arms underscores these risks . . . As State Treasurer, the costs and risks of gun violence are a matter of significant financial concern, and the business of guns is becoming an increasingly risky proposition. (emphasis added)
The Connecticut Treasurer teamed up with Rhode Island’s Treasurer in December 2021 and filed a shareholder proposal with Mastercard asking the board to stop processing sales transactions for “ghost guns” – home-assembly gun kits (see press release here).
Municipal bond work is a $4 trillion industry for banks in the United States. It is also extremely lucrative for law firms that do the underlying legal work, which prompted the American Bar Association to adopt Model Rule 7.6 as part of the Model Rules of Professional Conduct (see detailed history here), which prohibits firms from making campaign contributions to state or municipal officials in order to obtain contracts related to bond work. In the 1990’s, the chair of the Securities and Exchange Commission had requested that the ABA do something to end these commonplace “pay-to-play” scenarios.
During legislative debates about Texas SB 19, opponents raised concerns that excluding several of the largest banks from the Texas bond market would end up hurting municipalities in the state, who would find it more difficult or more expensive to find a bank to handle their future bond issues. It is not completely clear what effects will result from these laws in Texas, Wyoming, or Connecticut. It depends partly on how competitive the bond market is—a highly competitive market will see minimal price increases even with the exclusion of several banks. On the other hand, if the exclusion of these banks does result in price increases for Texas bond work, it would suggest that these firms have been enjoying monopoly/oligopoly rates up to now, which is a separate, but important, concern. The impact of these newfangled bank bans will also depend on cross-affiliate application of the law – the Texas statute, for example, is silent on this point. Large, national banks like Citi and Bank of America have dozens of subsidiaries and affiliates that are separate legal entities operating under different charters – some specialized regionally, some specialized by the type of banking services they offer (think consumer savings accounts and home mortgages versus commercial loans or bond issues). And even though news outlets reported that the big banks were backing away from the Texas bond market in the wake of SB 19, Citi was awarded a Texas bond contract just a few months after SB 19 passed – it was able to certify its compliance with the Texas law, despite its prior announcements about cutting ties with the gun industry. Even if the law does not produce higher bank rates for bond issuance, the process of certifying compliance means additional work for the bank’s lawyers (see discussion of ABA Model Rule 7.6 above) and for bond rating agencies.
Complicated History: The National Shooting Sports Foundation – the official trade association for gun manufacturers – published policy papers and testified at the Texas legislative hearings about SB 19, referencing Operation Choke Point, discussed above, as the source of its concerns about the banks slowly strangling the gun industry. Bill analysis within the legislative history of SB 19 also identifies Operation Choke Point as the impetus for the bill. The bill’s sponsor claimed that 75% of gun dealers in TX had faced financial discrimination.
A spokesman for the NSSF testified in a hearing that when Operation Choke Point “ended in 2016,” the same policies were “privatized” by banks, insurers & tech companies. This has become a standard narrative – the proposed Fair Access to Banking Act (S.563) includes as one of its findings:
the privatization of the discriminatory practices underlying Operation Choke Point by banks represents as great a threat to the national economy, national security, and the soundness of banking and financial markets in the United States as Operation Choke Point itself
The banks saw themselves as victims of Operation Choke Point (the regulatory initiatives were, after all, imposed on them, in hopes of indirectly defunding certain targeted industries), so it must come as a surprise to hear that they have now “privatized” Operation Choke Point with their ESG policies.
Regardless of their specific focus or target, ESG policies by banks have many detractors across the political spectrum who think it is bad business to mix political or moral agendas with lending. At the same time, bank reputational risk is emerging as a niche area of academic study. And there are cases where private-bank boycotts, even when politically motivated, can garner broad bipartisan support, as with the recent financial sanctions and private-bank divestment from Russia in response to its invasion of Ukraine. The perceived legitimacy of such banking practices seems to depend on the popularity of the cause.
[Ed. Note: This post is part of a series of essays that arose from the Center’s March 2022 Conference on Privatizing the Gun Debate.]