Ranking Season: Combating Commercial Banks’ Systemic Discrimination of Consumers
The American Business Law Journal (ABLJ) (2022 Forthcoming)
38 Pages Posted: 3 May 2021 Last revised: 11 Apr 2022
Date Written: May 1, 2021
Unlike the Federal Reserve (Fed) and its role as the lender of last resort, commercial banks do not seek to maximize social welfare, which can make them operate in ways that undermine the government’s fiscal policy goals. The case of disbursement of pandemic-related Federal relief funds, was a good illustration of these misaligned interests as commercial banks (semi-agents) had divergent objectives from the Federal Government’s (semi-principal’s) goals of Diversity, Equity and Inclusion (DEI). Accordingly, the discriminatory, self-interested, risk-return tradeoff behavior of banks worsened the economic crisis for many persons, especially harming women and minorities, and even intensifying racial injustice.
Banks play a unique role in the financial system, including their distinctive function in connection with money creation. Appreciating this unique role, some commentators have even suggested that banking regulation should be understood as a subcategory of infrastructure regulation. Focusing on this unique role, this Article argues that banks should help advance the government’s fiscal policy, which includes environmental, social and governance (ESG) goals, and particularly the DEI social agenda – at the very least during critical time junctures and economic crisis. But since government-calls or industry-led initiatives for banks to increase transparency in connection with their social activities do not guarantee that banks would promote the government social agendas even during future crises – and even if they do, they would probably do so in conjunction with pursuing their own strategic objectives – there is a need to adopt a top-down incentive-based regulatory approach. Specifically, financial regulators should intensify the public debate on DEI, by adopting a carrots and sticks-based system, which would require banks to provide transparency, integrity, and consistency in connection with addressing ESG goals in their businesses.
Illustrating a way to implement government fiscal policy goals by commercial banks, this Article argues that it is within the financial regulators' purview and legal mandate to require banks to do so, via adopting a CAMELS rating-like system that would be based on social goals such as DEI rating, which would help achieve the promotion of the government’s social policy objectives. The CAMELS rating encourages banks to carry out the government’s monetary policy, while ensuring the banks’ financial safety and soundness, by measuring their performance using financial ratios. This Article suggests creating an additional rating whereby banks can pursue their economic goals while fully complying with the Federal government’s fiscal policy directives. This suggested rating, unlike the CAMELS rating, would not measure financial soundness, but instead measure evaluate banks' commitment to financial inclusion, racial equity, and socially-responsible investing, and environmental stewardship, etc. If banks do not comply, they would be subject to public criticism and consequences, including depositors possibly taking out their money from lower-rated banks and redepositing them in top-rated banks, which could result in higher-rated banks overtaking lower-rated banks. Likewise, higher-rated banks would be encouraged by getting greater access to funds in future crises and more involvement in government programs. Thus, our suggested rating will provide an incentive for banks to compete for more socially responsible behavior. Lastly, DEI-based scores could also help commercial banks not find themselves on the losing side in connection with the growing movement towards public banks in the United States. Especially, if the banks would be wise enough to harness the power of FinTech, as a key driver for inclusion, and a tool that can support sustainable development goals.
Keywords: banking, discrimination, ESG, environmental, social, governance, diversity, equity, inclusion, financial regulation, federal reserve, banking, crises, crisis, CAMELS, rating, disclosure, transparency, government, fiscal, agenda, agents, agency, publicness, public, corporate social responsibility
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