Federal regulators pressured banks to withdraw from controversial industries. Most companies simply borrowed elsewhere, a new study finds.
In 2013, the US Department of Justice quietly launched a program called Operation Choke Point. Its aim was to pressure some banks into cutting ties with businesses that, while legal, were deemed risky from a social or reputational standpoint. Included in the operation were payday lenders, firearm and ammunition dealers, tobacco vendors, online gambling sites, and even escort services.
The strategy was simple: If targeted banks refused to lend to these controversial companies, their access to capital would dry up, eventually squeezing them out of the marketplace. The idea was a form of financial suffocation, achieved not through new laws or regulations but by warning banks that doing business with the controversial clients could invite heightened government scrutiny, investigations, or other unspecified sanctions.
Now, more than a decade later, a team of economists from the University of Rochester, University of Michigan, University of Maryland, and the Federal Reserve Board examined the results of Operation Choke Point. Their conclusion, published in the Journal of Financial Economics, is clear-the choking didn't really work.
"We found a decline among targeted banks and firms. But overall it didn't work because the operation singled out only a subset of banks," says Billy Xu, an assistant professor of finance at the University's Simon School of Business, who is a coauthor of the study. "What we got, essentially, was a decline in committed loans only among the targeted banks, but the targeted firms were able to establish new relationships with non-targeted banks."
That is, the targeted banks complied and tightened their lending to these so-called risky companies, while most of the businesses just walked next door and found other non-targeted lenders.
Firms adapt, banks relent
Operation Choke Point created a real-world laboratory to test whether restricting credit can discipline industries that regulators or society don't like or approve of.
Using confidential data from the Federal Reserve, covering more than 5,600 affected firms, the researchers found that the targeted banks singled out by the Justice Department did indeed reduce lending. Small and medium-sized businesses in controversial industries saw about a 10 percent drop in their credit lines. Borrowing became harder as loan maturities shortened, collateral lending requirements increased, and some banking relationships were abruptly terminated.
Yet, large businesses barely flinched as their credit lines stayed intact. In some cases, they even secured more lending to hedge against future government actions. The team surmises that's because large companies usually have more sway with lenders-their own or new ones.
The critical finding: Affected firms simply switched banks. Companies, many of them thoroughly profitable enterprises, that lost credit at targeted banks opened accounts with non-targeted banks instead.
"As one bank gives up business," Xu notes, "another bank steps in and takes advantage of that."
Overall, the researchers found no meaningful reduction in the borrowing ability of controversial firms, nor did their investment, profitability, or business performance change.
Bottom line: While Operation Choke Point succeeded at pressuring some banks, it failed to choke the industries themselves.
The limits of financial pressure
Why didn't it work? One explanation could be that the operation targeted only a subset of large banks-and not the entire financial system.
Xu likens it to a row of running faucets: "If you are trying to stop the water but you turn the taps off in one place only-it's likely not enough. You'll have to turn them off everywhere else, too, which can be costly or infeasible."
Moreover, the policy relied on informal coercion rather than formal legislation. In the end, the operation was terminated in 2017 after congressional criticism and lawsuits accused regulators of intimidation and overreach.
Ultimately, Operation Choke Point is part of a broader debate about how finance policies can be used to drive social change. From climate activism to responsible investing, advocates have argued that withholding capital can be a powerful lever. Yet the evidence, say the researchers, suggests that unless restrictions are broad and coordinated the plan won't work.
"Targeted credit rationing is largely ineffective at imposing costs on firms in controversial industries," the team writes.
Operation Choke Point was a test case of how financial pressure might police morality. The results show the limits of that strategy as credit can be redirected, and firms are resilient in finding new sources of funding. For policymakers, investors, and activists who hope that cutting off financing will reshape industries, the message may be sobering-starving companies of money is much harder than it sounds.
