Monday, November 14, 2011

Banking regulation

When Congress passed regulations reducing the amount of money collected by banks through debit card fees, basic economic theory dictated that the loss of revenue would be made up through higher charges to consumers in a bid to make up lost revenue. According to The New York Times, that's exactly what's happening:

Banks can still earn a profit on most checking accounts. But they are under intense pressure to make up an estimated $12 billion a year of income that vanished with the passage of rules curbing lucrative overdraft charges and lowering debit card swipe fees.

...Put another way, banks would need to recoup, on average, between $15 and $20 a month from each depositor just to earn what they did in the past, according to an analysis of the interest rate and regulatory changes on checking accounts by Oliver Wyman, a financial consulting firm.

For consumers, the result is a quiet creep of new charges and higher fees for everything from cash withdrawals at ATMs to wire payments, paper statements and in some cases, even the overdraft charges that lawmakers hoped to ratchet down. What is more, banks are raising minimum account balances and adding other new requirements so that it is harder for customers to qualify for fee waivers.

...It costs most banks between $200 and $300 a year to maintain a retail checking account, from staffing branches to covering federal deposit insurance premiums. In the past, the fees banks collected from merchants each time customers swiped their debit card or overdrew their account covered much of that expense. Banks offered “free checking” to the masses as a result.

But the economics have drastically changed over the past two years. Income earned on deposits has fallen, while the revenue gained from fees has plunged by as much as half because of the new regulations. Today, according to Oliver Wyman, banks are expected to take in, on average, between $85 and $115 in fees a year per account — making it especially hard to turn a profit on customers with low balances.

“They have got to make up the income some place,” said Vernon Hill II, the founder of Commerce Bank whose retail-oriented approach transformed it into a large regional player before it was sold to TD Bank. He added: “I think we will see a lot more fees.”
Anyone with even a rudimentary grasp of economics should have seen this coming. That Congress nevertheless proceeded with passage of its misguided regulations indicates that our politicians either haven't the faintest clue how the economy and businesses operate or simply don't care. As with the misplaced ire of the Occupy Wall Street protesters, anger over rising fees and lowered interest rates should be directed at one place: Washington.

Update: Related thoughts from Anthony Randazzo and James Groth. 

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