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The Justice Department touts its Operation Choke Point as a good-faith effort to crack down on illegal businesses, weed out fraud and protect consumers. None of these claims is true.

It is becoming clear that the real goal of the program announced last year—or at the very least a desired collateral benefit—is to target entire industries deemed undesirable by putting regulatory pressure on the banks that serve them. The House Oversight and Government Reform Committee recently released evidence that “federal regulators are pressuring banks to terminate relationships with legal yet disfavored industries, without regard to the legitimacy or risk profile of individual companies,” Last week, the Federal Deposit Insurance Corp. and Justice Department announced that they will launch investigations into Operation Choke Point.

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[The following article was published November 10, 2014 by the SEACEN Financial Stability Journal, a quarterly journal published by The South East Asian Central Banks Research and Training Centre.]

I have traveled to Asia many times over the past thirty years, and it is my sense
that policy makers in Asia tend to look to the U.S. for leadership on financial regulatory
issues. This is somewhat unfortunate, as the U.S. has made many mistakes in financial
regulation in recent decades. In my view Asia and the rest of the world should not
emulate the U.S. but should instead study the U.S. to learn from both our successes
and our failures in financial regulation. I hope to provide in this article an objective
and candid assessment of U.S. financial regulatory policies.

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In any line of business, there are some good operators and some who refuse to play by the rules. The same holds true among payday lenders, check cashers and other alternative financial service providers. It’s clear that we must protect consumers from those who seek to take unfair advantage. Regulators and law enforcement agencies need to be aggressive with companies that are ethically challenged or lax in observing the law.

Where regulators and law enforcement agencies lose me is when they cast a net so wide that they fail to distinguish good operators from the not so good. The Department of Justice’s Operation Choke Point program, apparently run in conjunction with the Federal Trade Commission and some bank regulators, casts a net so indiscriminately that one can only conclude that it is intended to drive all providers of alternative financial services out of business by denying them access to the banking system and harassing them with regulatory enforcement actions. This type of action drives banks to “derisk” (i.e.,dump) alternative financial service providers to avoid unwarranted scrutiny and greatly increased costs for risk controls.

This represents a serious abuse of government power. It is causing significant harm to the economy generally and to tens of millions of working-class Americans for whom alternative financial services provide a lifeline.

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