The High Stakes of Cannabis Banking

The U.S. Drug Enforcement Agency’s (DEA) recent proposal to reclassify cannabis from a Schedule I to a Schedule III drug introduces a complex array of opportunities and challenges for banks. While this potential change could significantly reduce the stigma and regulatory burdens associated with banking the cannabis industry, it also presents a nuanced risk landscape that banks must approach carefully, writes Senior Editor Michael Bender in a new RMA Journal article. Here are some key takeaways: 

• Reclassifying cannabis signals another step toward federal legalization, reducing the reputational and regulatory risks for banks. Stanley Jutkowitz, senior counsel at law firm Seyfarth Shaw, notes that this shift could eliminate concerns about federal actions against banks serving the cannabis industry. 
• Community banks are in the pole position in local cannabis markets due to their understanding of state-specific regulations and local customers. But this highly specialized class of borrower poses unique lending challenges. The 2024 RMA Community Bank Survey shows that 89% of community banks currently avoid the sector. 
• Lessons can be learned from early adopters. Institutions like FVCbank have navigated the cannabis industry by collaborating with regulators and understanding factors such as licensing, tax rates, and local enforcement—all key elements in assessing creditworthiness. 
• Rescheduling cannabis could nullify Section 280E of the U.S. tax code, which disallows deductions for cannabis businesses. This change would make cannabis companies more profitable and loans easier to underwrite. 
• Lingering uncertainties remain. The reclassification faces opposition from groups such as Smart Approaches to Marijuana, an alliance of mental and public health professionals. In addition, inconsistent state laws, potential federal policy reversals, and ongoing regulatory hurdles continue to affect the banking industry’s approach to cannabis. 

Still, Jutkowitz says risk managers “might advise less caution given the regulatory trajectory.” 

“There will be some banks that look at [reclassification] as a path to federal legalization and will no longer worry about reputational risk,” he said. “Whatever concerns they had about the Fed seizing their loan collateral or suspending their banking licenses may go away.” 

Read the complete article.