I’ve written two previous posts summarizing observations of consumer finance blogger Patrick McKenzie on, respectively, why laws against lying to banks are drawn to serve the interests of prosecutors and why the culture of regulatory compliance is ingratiating in a literally cringey way. I’ll finish the series with a few excerpts from his posts on a theme familiar to Cato readers: why the oft-discussed predicament of the unbanked — persons, often living at social margins, who lack bank accounts — is to an important extent driven by government policies themselves.

As one example among several, consider the filing of SARs (suspicious activity reports), in which a bank reports to a central law enforcement database a transaction that might or might not reflect financial irregularity. McKenzie’s example (from Japan, but it could have been from here) is that of an emigrant worker who wants to wire money back to the home continent for a cousin’s tuition payment, but cannot document that reason to the bank’s satisfaction as know your customer policies require, and gets angry at bank staff on being turned down. The bank generates a SAR which, like the overwhelming majority of such, most likely is never read by any law enforcer and generates no legal consequence of any kind.

However, SARs are relatively expensive for a bank to process. A client who produces an excessive number of them will be judged as ipso facto a compliance risk. This means that clients who generate SARs will often be forcibly offboarded with the fact of the SAR being filed being the true reason for the offboarding.

At many institutions, one SAR is a non-event. Two, for a retail client, means one gets a letter saying the bank wishes you the best in your future endeavors and will not bank you anymore. That letter will often mention that this is a commercial decision of the bank and will not be reversed. Some clients receiving that letter will, on attempting to open [an] account at a different bank, get refused because the first bank entered them into [a reporting clearinghouse] as “account closed at bank’s discretion” and the second bank, on reviewing that entry, said “yep, we are not touching this hot potato.”

Regulators then shrug, saying it was the banks’ decision rather than theirs. “And meanwhile, there is an actual person who has done nothing wrong and now finds themselves somewhere between greatly inconvenienced and frozen out of the financial system entirely.”

Interactions with the legal system, such as outstanding judgments or the nominal illegality of a business like that of marijuana, can be a millstone as well.

Policy making involves tradeoffs, including tradeoffs that one does not want to acknowledge one is making. A recurring thing which comes up in surveys of the underbanked is that certain legally disfavored men think that banks will take their money from them. They’re basically correct in this belief. We prioritize child support collection over some men being bankable. Almost nobody is comfortable saying that they intend this in as many words. But as a society, yes, we unquestionably intend this outcome.

Cato scholars have written extensively for years on the policy reasons so many U.S. residents are unbanked; examples can be found here (reasons consumers avoid banks), here (Bank Secrecy Act and other laws), here (restrictions on bank formats), here (fee controls), and generally here.