Thursday, September 29, 2011
Pay attention, your government is costing you money in the name of "reform."
The federal government has enacted regulations under the Dodd-Frank Act that control the prices that banks may charge merchants for debit card transactions, cutting them on average by roughly 50% (from about $0.44 per transaction to $0.24, in the case of Bank of America). The aggregate dollars are not small; the new regulations have opened up an estimated $6.6 billion revenue gap for the biggest card issuers.
Predictably and obviously, the banks are doing their job and casting around for ways to recover that lost fee income. To that end, Bank of America has announced that beginning next year it will charge its own depositors $5 per month for the privilege of using debit cards to buy things (but not to withdraw money from ATMs). Taking in to account the $0.20 per transaction "savings" imposed by the feds, BofA's proposed monthly fee will generate more revenue than has been lost in the case of any customer who uses his debit card for purchases fewer than 25 times per month. Other large banks are following suit.
Put differently, this little corner of Dodd-Frank has potentially extracted a multi-billion dollar transfer from debt card holders to merchants, with the banks earning a nice incremental vig along the way. Why, exactly, is this useful policy? What other idiocy lurks therein?
As much as I have a problem with the Feds telling banks what the fee has to be (let the market decide), the fact that the banks are upping fees all around was going to happen anyway given economic conditions and the condition of bank balance sheets. The real issue is that many banks played with taxpayers' money (Fed window, yada yada), and helped the country get leveraged to the hilt. Bad government incentives/policy, little bank skin in the game (on the face of it) to worry about risk, short sighted compensation policies. The usual suspects, in other words.
Anon, which comment, mine or TH? If mine, I am referring to the big money center banks that had access to very cheap credit which was not exactly directed to "banking business" per se. I am not referring to smaller institutions that are basically "banking" and not trading, securitizing, laying off risks elsewhere, doing "prop" business. I have nothing against any of those activities, mind you, and in fact think they are essential. What I don't support is using Treasury money to finance non banking activities. Some of the banks have decent risk control systems but most don't really understand the risks or don't worry about it since they farm it out. And the "bankers" get paid this year (bonuses) while the deals go bad a few years down the road. And the financial system has been jeopardized as a result.
When doing transaction processing, etc. like debit cards, our Big Banks are now like the big electric utilities that were once cutting edge but have now faded so far into the background of our day-to-day that we forget that they're there until an occasional outage. It costs Bank of America (BAC) far, far less than the new, lower mandated price of $0.24 for BAC to process a debit card transaction. BAC was using oligopolistic position to price gouge.
After our 2008-2009 financial crisis, we wound up with an alarming concentration of just a few true Retail Banks having dominant national market share: BAC, Wells Fargo, JP Morgan Chase, and in some places Citibank.
For reasons having nothing to due with debit cards, at least two of these Big Banks are Fundamentally Broke: BAC and Citi. Add Goldman and Morgan Stanley to that list. Don't believe me? Then why are they trading at such a huge discount to their book value. Their current financial statements are a lie that the market sees through. They'd trade lower still but for still implicit Federal backing (paging Doctor Buffet!)
Wizard Ben is using all the magical powers of the Fed that he can conjour to prop up a political-financial system that may crush under its own weight. It hasn't yet, only because Europe sucks more.
The citizens of the USA are already paying a huge (but largely hidden) cost to prop up a handful of Big Banks. We'll see it when Wizard Ben's postdated checks come due.
Meanwhile, BAC wants to nickel and dime its customers with debit charges and monthly fees to buy another year or two, because they're that desperate.
Where am I wrong?
Well, Ig, I'm not sure you are wrong, per se, but there is a more benign way to look at it. Because lending rates are so low, and the spread between the cost of deposits (including all the administrative hassle of dealing with depositors) and the interest that a bank can charge is darn near non-existent, fees are the only real source of income for traditional banking. So banks charge fees when they originate loans, and they charge depositors fees for the various administrative benefits associated with accounts. From the consumer's point of view, the debit/ATM card is very high on the list of benefits of dealing with a bank. The proof of this is that people are willing to pay high fees (in percentage terms) to use the card at ATMs. Well, now the government is controlling the prices that banks may charge retailers, and they have a huge revenue hole to fill. Where they were reluctant before to charge a monthly debit card fee (their customers do not much like them as it is), they have to fill the hole caused by the reg.
Anon Attorney here.
Iggy, another home run post. How long before BAC implements a reverse 5:1 or 10:1 split to try to keep its share price from falling below $5?? Reset, then start the inevitable fall to zero again . . .
No matter *what* the actual effect of any banking regulation, the banks will use it as an excuse to raise fees. And as much as I hate the Dodd-Frank bill, the numbers listed are just "Caps" (which the banks treat as "Rates" in the same way that we look at speed limit signs)
Bad News: Worlwide Banks are Screwed.
Good News: Our banks are screwed less than their banks.
Bad News: Congress is working on the problem.
There's a new post on Zero Hedge that's quite informative. It highlights key points that David Stockman (Reagan's budget director) makes in a lengthy interview that goes to some of the points many of us have been making here. It's here
Stockman says that Wizard Ben's Zero Interest Rate Policy (ZIRP) is subsidizing US banks by $300 to $400 billion per year, much of which goes to the Big Banks.
He says that ZIRP is why Obama and Congress don't have to get serious about spending cuts in the near-term.
He compares the US economy to a big LBO where we're carrying more than twice the debt load that we should.
What happens when Wizard Ben can no longer magically define the entire yield curve?
Stockman believes in Peak Oil. I don't. For the next ten years -- maybe even much longer -- we actually have our own domestic sources, if we just go balls out. It's a political issue, and maybe the single most important thing that the 2012 election addresses. That's because it's an issue that can be put to the American voter facing a choice between Obama and a Republican. Winning this issue creates momentum on lots of fronts, including GDP growth.
To go balls out on oil, we need to call the bullshit on Anthropomorphic Global Warming. I wrote here about a year ago about how physicists at CERN were doing actual experiments to test their hypothesis that sun spot cycles create variance in how many heavy subatomic particles hit the Earth's oceans, which drives cycles in cloud cover that's much more significant an effect than how much heat gets captured by the less than 0.04% CO2 that's in the atmosphere. They recently published initial results that support their hypothesis.
Stockman is becoming a Gold Bug. But I don't know if the World can replace fiat money with gold -- there's not enough gold.
Oil can actually be a partial substitute for gold. We could actually use it as a kind of money.
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"[S]pread between the cost of deposits (including all the administrative hassle of dealing with depositors) and the interest that a bank can charge is darn near non-existent" -- I don't quite see this. The rates at which banks can get money is practically nonexistent, whereas mortgage rates display an incompressible bottom not much lower than when fed rate was 2% higher.
As far as complaining about too much or wrong regulations, sooner or later you'll have to face the fact that if none of the enlightened do anything to address PERCEIVED problems, then someone else will do something for you. The congressional Republicans have finally been forced to get this. Time for a new party between the parties of "spend and regulate" and "no". Oh but wait, can't happen in 2-party America...