Does Bank Consolidation Harm Customers?

By Jeffrey Miron of Cato. 

"Antitrust policy presents a challenge for both libertarians and policymakers. On the one hand, competitive markets are good, which might suggest policy should limit firm mergers. On the other hand, mergers can have beneficial effects (such as economies of scale and scope, or disciplining unproductive firms), so broad opposition to mergers is likely counterproductive.

New research on bank consolidation offers evidence on this tradeoff. Contrary to the belief

that bank mergers reduce competition, increase borrowing costs, and limit households’ access to credit, … [the study finds that m]ergers have no meaningful effect on interest rates, approval rates, or late payments. Merged banks do not appear to use their increased size to charge borrowers more or restrict access to mortgages.

This may be due to

the intense competition in local mortgage markets. The typical county has more than 130 active mortgage lenders per quarter, and the median lender controls just 0.4 percent of its local market. Therefore, even when two banks merge, borrowers generally continue to have many other lending options. In some cases, local competition actually increases after mergers.

Whether these conclusions apply in markets with only a few firms, where mergers might substantially increase market concentration, is harder to know. But this evidence should still remind antitrust and banking regulators to consider the full range of effects from mergers, not just the impact on concentration per se."

Can De-Regulation of Branch Banking Improve Capital Allocation?

Evidence from the Great Depression

From Jeffrey Miron.

"The Great Depression led to dramatic increases in bank regulation.

One study looks at an instance of bank deregulation during this period: state-level sanctioning of

bank branching, which allowed banks to operate multiple offices within a state. … [S]tates with extensive branching in 1940 … experienced long-run gains in manufacturing productivity.

The study also

assessed the role of capital reallocation using bank and branch-level balance sheet data from 1937. … Branch offices located in capital-constrained counties … were twice as likely to receive funding on net from other banks and branches than comparable stand-alone banks in the same areas.

In addition, the new

branch networks improved capital allocation by directing funds to where they were most scarce, a function that stand-alone banks could not perform.

All in all, these

findings provide evidence that the institutional structure of branching—rather than simply expanded banking access—improved capital allocation and integrated financial markets to fuel manufacturing productivity growth, especially in underserved areas."

Banks, Regulators and ‘Reputational Risk’

A new Trump rule would bar debanking for political reasons

WSJ editorial. Excerpts:

"Regulators are supposed to supervise banks for safety and soundness. That means their management of financial risks. But Congressional investigations dating to the Obama years have found cases of examiners jaw-boning banks to deny services to customers that allegedly pose a “reputational risk,” such as payday lenders, gun retailers and crypto."

"What is a reputational risk? Regulators have never clearly defined the term"

It has "proven nearly impossible to assess or quantify with accuracy"

"Banks say . . . they have felt pressure by regulators to close accounts tagged as reputational risks." 

Bank Deregulation, New Businesses, and Race and Gender

From Jeffrey Miron. 

"Women and minorities start businesses at significantly lower rates than men and whites.

One study examines whether this disparity reflects, in part, access to financing, which

has long been recognized as a major obstacle to business success, particularly for racial minorities.

By measuring the availability of credit before and after passage of major banking bills, the study finds that

the deregulation of interstate banking in the United States between 1994 and 2021 narrowed gender and racial disparities in entrepreneurship by expanding and improving banking services, reducing discrimination in the financial market, and narrowing gaps in firm performance.

Once more, deregulation enables positive change through the free market."

A Serious Moral Hazard in the Banking System

In a market where one group is more subsidized than the other, you can be sure of who won’t survive

Letter to The WSJ. 

"Treasury Secretary Scott Bessent and Sen. Bill Hagerty (R., Tenn.) write that raising the Federal Deposit Insurance Corp. limit to $10 million would put regional and community banks on an even playing field with larger institutions (Letters, Oct. 31). Your Oct. 20 editorial “How to Make Banks Less Safe” argues that such an expansion would put the average taxpayer at greater risk should a bank fail. You both have a point.

Deposit insurance does create moral hazard within the banking system. Yet the application of market discipline to banking is so little practiced that it no longer plays a significant role in disciplining the industry. For a majority of banks, profits are privatized and losses likely to be socialized.

As we learned in 2008-09 and again in 2023, the government will pay the uninsured depositor at failed banks with more than $100 billion in assets par value. This guarantee covers the banks that have nearly 70% of all assets and leaves a serious moral hazard issue that isn’t being addressed. It also leaves only 30% of the industry subject to market discipline.

In a market where one group is more subsidized than the other, you can be pretty confident about who won’t survive.

Thomas Hoenig

Kansas City, Mo.

Mr. Hoenig was vice chairman of the FDIC (2012-18)."

Tricolor and Treasury’s Seal of Approval

Did a political blessing from the feds encourage a lack of due diligence by lenders to the failed subprime auto lender?

WSJ editorial. Excerpts:

"For example, Texas regulators had cited Tricolor more than 130 times between 2019 and 2022, including for selling cars for which it didn’t hold title. The dealer also sold cars at prices on average 46% more than Kelley Blue Book’s “fair purchase price” value. Many customers defaulted in short order, resulting in cars being repossessed, which Tricolor then resold.

Yet the Treasury Department in 2019 designated Tricolor as a Community Development Financial Institution (CDFI). Congress established the program in 1994 with the goal of expanding credit for minority and lower-income folks. The CDFI designation makes businesses eligible for special grants. It can also lower their borrowing costs. 

Banks can meet their Community Reinvestment Act obligations to invest in low-income communities by lending to CDFIs."

"Much of Tricolor’s marketing was hype, but investors didn’t notice or care. Tricolor borrowed billions of dollars from banks to make loans to customers, which were then packaged and sold as part of asset-backed securities to investors such as Pacific Investment Management Co. and AllianceBernstein.

Tricolor said last year that a bond offering “was oversubscribed by nearly 6.5 times.” The Treasury imprimatur and financing by sophisticated institutions may have given investors a false sense of security and caused them to relax underwriting standards. An eternal lesson relearned the hard way."

Deregulate the Remittance Industry

By Jeffrey Miron of Cato.

"Exchanging money with friends or family should be simple and costless. While this currently occurs for many domestic transfers (think Venmo or Zelle), international remittances from hundreds of millions of migrants, totaling $905 billion in 2024, tell a different story. As of Q1 2025, the global average cost of remittances sits at 6.49 percent. And these costs are so high in some areas that senders use stablecoins instead. Although advancements in banking technology and infrastructure have lowered costs, several factors continue to make remittances expensive and slow. The most notable is the regulatory requirement for remittance transactions.

In the US, money service businesses are subject to the 1970 Bank Secrecy Act (BSA) and its numerous subsequent modifications, especially the post‑9/​11 Patriot Act and the 2020 Anti-Money Laundering (AML) Act. Although international money transfer regulations vary across countries, all such policies are extensive, expensive, and complicated.

Remittance regulations force money service providers to act as law enforcement, collecting detailed personal data, performing extensive customer screenings to bar sanctioned individuals, obtaining licenses in both sending and receiving countries, and hiring additional compliance personnel. US financial institutions spent $46 billion in 2022 on compliance. Unfortunately, a 2022 IMF working paper finds that

the price of sending remittances [tends] to be higher in countries that impose controls on remittance transactions, since these operate like a tax that is likely to be passed onto recipients.

Not only does this regulatory regime impose costs on consumers, but it also decreases competition. Due to regulatory requirements, entry into the remittance market is difficult, so the number of operators is small. This often results in a nearly oligopolistic market, including major banks with pricing and markup power.

The authors of the IMF working paper concluded that

the market structure is important: banks charge higher fees than money transfer operators (MTOs), [and] a larger share of banks among remittance service providers is also associated with higher fees charged by MTO[s].

To put these costs into perspective, MTOs consistently charge a significantly lower fee (5.04% as of Q1 2025), when compared to banks (14.55% as of Q1 2025).

Indeed, competition in the remittance market directly contributes to price reductions, according to this IMF article:

[a]n example where competition has spurred reductions in fees is in the U.S.–Mexico corridor, where remittance fees have fallen by more than 50 percent from over $26 (to send $300) in 1999 to about $12 in 2005.

Finally, after 44 years of the BSA,

[a]s late as 2014, academic research affirmed that possible benefits from the existing AML framework (internationally) had not yet been demonstrated.

Indeed, the BSA/AML regime seems to result in excessive overreporting: only 4 percent of suspicious Activity Reports (SARs, which are the mandatory reports financial institutions submit to the US Financial Crimes Enforcement Network) received any type of feedback from law enforcement. Finally, alternative money transfer channels such as crypto, where transactions are anonymous, practically untraceable, and most importantly, cheap, are increasingly available, allowing illicit transactions to bypass remittance regulatory frameworks.

In summary, regulatory overhead on international money transfer provides little to no security benefits while imposing significant costs for both money service providers and remitters. The right response is deregulation of the remittance industry to allow decreased operational costs and increased competition.

This article appeared on Substack on August 20, 2025. Eric Jin, a student at Southridge School, co-wrote this post."

 

Trump Is Right on ‘Debanking’

Regulators have abused their power to cut off political opponents

WSJ editorial. Excerpts:

"bank examiners have pressed banks to cut off certain groups, businesses or individuals.

Starting in the mid-1990s, financial regulators started considering “reputational risk” in grading banks for safety and soundness. If a bank provides services to an unsavory business, examiners could sanction it. During Operation Choke Point, Obama regulators pushed banks to cut off gun retailers and payday lenders by deeming them reputational risks.

Regulators backed off after Republicans in Congress exposed the pressure campaign, but Biden appointees used the same tactic to clamp down on crypto. Banking regulators this year committed not to grade banks based on reputational risk, and Mr. Trump’s order directs them to remove it from guidance documents and examination manuals."

"But the FBI and Treasury abused the system [Bank Secrecy Act] to conduct a dragnet investigation of conservatives. A House Judiciary Committee report last fall detailed how the FBI “suggested” banks file SARs on “suspicious” people tied to the Jan. 6 riot so they could investigate them without a warrant. There’s no such thing as a “suggestion” from government overlords."

"Violations of the Bank Secrecy Act can lead to penalties of hundreds of millions of dollars"  

Fifteen Years of Dodd-Frank: A Legacy of Missed Targets and Regulatory Overreach

By Norbert Michel of Cato.

+As we mark the 15th anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it’s a great time to ask whether the law lived up to the hype. Admittedly, it’s rather difficult for someone who edited The Case Against Dodd-Frank to be objective, but let’s start with the law’s preamble.

Right there on page 1 (out of 850), it says that Congress enacted Dodd-Frank to:

…promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail,” to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Well, Dodd-Frank clearly failed to end “too big to fail” or to end bailouts; the 2023 banking crisis and the government’s response took care of those. And those two items go hand in hand with “improving accountability and transparency in the financial system,” so it’s pretty safe to judge the Act a failure based on the preamble.

Still, many critics like to blame those 2023 bank failures on the first Trump administration for signing into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Economic Growth Act). But that law did not “gut” Dodd-Frank. In fact, it didn’t repeal one single title (out of 16) of Dodd-Frank. Objectively, it’s difficult to even say that the Economic Growth Act “rolled back” any of Dodd-Frank.

The quick version of what happened starts with Dodd-Frank’s requirement to impose “enhanced” regulations for bank holding companies with assets of more than $50 billion. Few seem to recall, but Section 165 of Dodd-Frank authorized the Fed to implement enhanced standards in a tailored fashion based on specific risks for specific companies. Under certain conditions, Dodd-Frank even authorized the Fed to establish an asset threshold above $50 billion.

So, what did the Economic Growth Act do? It essentially changed the threshold for the Fed’s enhanced supervision to $100 billion. It’s important to note, though, that the Economic Growth Act still left the Fed with the discretion to impose enhanced supervision on bank holding companies below the new $100 billion threshold. So, not such a radical change.

Regardless, the dirty little secret is that federal banking regulators didn’t really need Dodd-Frank to implement higher capital and liquidity ratios. In fact, federal regulators started stress tests before the Dodd-Frank Act was signed into law.

There are many problems with the existing bank capital regime and with how the Biden administration arbitrarily tried to implement more burdensome capital rules, but those problems go well beyond Dodd-Frank. Most of that capital framework reflects federal regulators’ decision to implement the Basel III framework, which has roots dating back to (at least) the 1980s.

Other Major Dodd-Frank Provisions

Aside from heightened capital standards, two of the main features of Dodd-Frank were the creation of the Financial Stability Oversight Council (FSOC) and Orderly Liquidation Authority (OLA). Title I of Dodd-Frank created the FSOC, a body of regulators charged with identifying risks to the financial stability of the United States and preventing the expectation of bailouts. The OLA, created by Title II of Dodd-Frank, was supposed to resolve large financial institutions in the event of their failure.

As we now know, the FSOC completely missed the 2023 banking turmoil, and the OLA has yet to be used. So much for the main pillars of Dodd-Frank. (By the way, Title XI of Dodd-Frank was also supposed to help end Fed or FDIC bailouts. As the 2023 banking crisis proved, Title XI merely formalized the type of collaborative bailout process between federal officials that was used during the 2008 crisis.)

Title VII was one of the other major Dodd-Frank changes. Title VII imposed a requirement to “clear” more over-the-counter (OTC) derivatives through central counterparties (CCPs). Aside from whether Title VII addressed the main causes of the 2008 financial crisis—it did not—it’s difficult to call Title VII a success.

Prior to the crisis, virtually all the counterparties using OTC derivatives were large banks that negotiated their own terms. If federal banking regulators truly needed more insight into those derivatives, they didn’t need any additional authority to get it. And if they wanted to implement higher capital requirements (or liquidity or even margin requirements) for those derivatives, they could have. They were already considered in banks’ capital requirements.

Simply put, Title VII did not reduce the overall risk from these derivatives; it merely concentrated that risk in the CCPs. (It’s also worth noting that the clearing requirement was the reason the Fed urged Congress to include Title VIII in Dodd-Frank, so that the CCPs would be plugged into the Fed in the event of a failure.)

The last major component of Dodd-Frank is the infamous Title X, the one that created the Consumer Financial Protection Bureau (CFPB). As I’ve written many times, it was not necessary to create a new government agency for consumer protection. Multiple federal agencies, as well as state agencies, were already carrying out that function. To create the CFPB, Title X consolidated most of the federal consumer protection statutes under the Bureau, but there was no reason it couldn’t have consolidated them under, just for example, the Federal Trade Commission. As for the new “abusive” standard of consumer protection, Dodd-Frank didn’t bother to define it. (Neither has the Bureau.)

The CFPB has been controversial from the beginning, partly because it was created with such an odd “independent” structure. One of the Bureau’s first significant acts was to go against the long-standing interpretation of the federal statute that governed real estate closings. It then retroactively applied its new interpretation and sued a mortgage company for more than $100 million, a lawsuit that ultimately made it easier for a US president to remove a CFPB director.

Controversial structure aside, some folks believe that creating the CFPB addressed the so-called predatory lending practices that caused the 2008 financial crisis. But there are a few problems with that story. First, it defies reason to think that all the borrowers who defaulted on their mortgages in 2008 were simply tricked into buying a home, not realizing they would have to make monthly payments of a certain amount.

Second, even if one believes this view, the supposed fix in Dodd-Frank was to require lenders to meet an ability to repay standard (enforced by the CFPB). But that standard was only an expansion of lending restrictions first implemented by the 1994 Home Ownership and Equity Protection Act (HOEPA). So, again, the idea that Dodd-Frank (or the creation of the CFPB) was a necessary fix rests on shaky ground.

Some folks hold a more subtle version of this so-called predatory lending view. In this telling, the real problem was that lenders failed to explain to borrowers with adjustable rate mortgages (ARMs) that their interest rates and mortgage payments might increase. Research has shown, however, that fixed rate mortgages (FRMs) showed just as many signs of distress as did ARMs. Regardless, Dodd-Frank did not outlaw ARMs, and it is undeniable that lenders had to disclose details of those mortgages prior to the 2008 crisis.

Finally, evidence of fraud in the mortgage market prior to the crisis is sparse and most often fails to support widespread consumer-facing fraud of the type prevalent in the predatory lending story. Instead, it shows that lenders (in some cases) ran afoul of their responsibilities to accurately document consumer information for institutional investors purchasing mortgages. For instance, as this US Housing and Urban Development report states, several studies show that “the vast majority of fraud involves misrepresentation of information on loan applications related to income, employment, or occupancy of the home by the borrower.” That’s a problem for the pro-Dodd-Frank camp for several reasons, but mainly because this type of fraud was already illegal prior to the 2008 crisis.

A Final Word on Dodd-Frank

There are many other small provisions of Dodd-Frank that have virtually nothing to do with the 2008 financial crisis. Most people have likely never heard of these provisions, such as Title IX’s securities lending reporting or self-regulatory organization fee filing provisions. These items likely mean a great deal to several financial practitioners, but that makes it very difficult for others to judge whether these provisions were even necessary. Arguably, many of these provisions created a regulatory mess where none previously existed. 

Overall, it’s very hard to celebrate the Dodd-Frank Act’s 15th anniversary. The Act was based on a mistaken belief that the 2008 crisis stemmed from unregulated financial markets. It spawned hundreds of separate rulemakings and was the most extensive financial regulatory bill since the 1930s. It expanded the authority of existing federal regulators, created new federal agencies, and altered the regulatory framework for several distinct financial sectors. It imposed unnecessarily high compliance burdens, failed to solve the too-big-to-fail problem, and didn’t end bailouts.

Worse, it further cemented the notion that the federal government should plan, protect, and prop up the financial system. Fifteen years on, the Act stands not as a triumph of reform but as a case study in how sweeping legislation can miss the mark—and make future crises more likely, not less."

Good Night to a Biden Overdraft Rule

The Senate nixes a price control on credit. Will the House follow?

WSJ editorial. Excerpts:

"The rule effectively caps what banks can charge when consumers overdraft their checking accounts, at $5 per transaction, down from today’s $35 average. The agency dubiously styled such fees as loans, which are subject to more regulations."

"a Federal Reserve Bank of New York study that found such caps “hinder financial inclusion” because “banks reduce overdraft coverage and deposit supply.” The rule would cause banks to drop overdraft protection and raise other fees, including on checking accounts. Lower-income folks would lose access to the banking system and perhaps have to pay more to get payday loans." 

"Many banks have already slashed overdraft fees to compete with fintech firms."

The Truth About the CFPB’s Mortgage Rules

Policymakers need to stop pretending that ever-expanding mortgage leverage is the solution

Letter to The WSJ. 

"In their March 13 op-ed “Trump Harms Consumers by Weakening the CFPB,” Chris Dodd and Barney Frank, authors of the act establishing the Consumer Financial Protection Bureau, note that “the law prohibits the granting of mortgages that burden home buyers beyond their capacity to repay.”

The truth is that the CFPB, through its Qualified Mortgage rule and its ever-expanding debt-to-income (DTI) ratio, has enabled the granting of mortgages that exceed home buyers ability to pay, which has helped fuel rising housing costs. When implemented in 2014, it included a hard 43% pre-tax DTI limit. Then came the loopholes. First through the “QM Patch,” allowing Fannie Mae and Freddie Mac to securitize loans with DTIs up to 45% and, later on, to 50%. Then, it granted the Federal Housing Administration, Department of Veterans Affairs and U.S. Department of Agriculture’s Rural Housing Services the authority to set their own QM rules. The FHA set its maximum DTI at 57%.

It doubled down in 2020, when it rewrote the QM definition, scrapping the DTI limit entirely and replacing it with a rate-based test. We warned at the time that this was a deeply flawed measure of mortgage risk, which would do nothing to curb runaway home prices.

As Federal Reserve Board chairman Marriner Eccles pointed out in 1947: “If [expanded credit] calls forth more production it will be desirable. If it only permits one borrower to bid against another would-be buyer for scarce goods and thus adds to upward pressure on prices, it is dangerous.”

In 2013 only 24% of Fannie, Freddie and FHA mortgages had DTIs above 43%. Today that has nearly doubled. Home prices have skyrocketed 130% since 2013, while wages have risen less than 40%. Policymakers need to stop pretending that ever-expanding mortgage leverage is the solution.

Ed Pinto and Tobias Peter

American Enterprise Institute

Washington"

U.S. Anti-Money Laundering Laws Are Outdated. Regulators Are Struggling With How to Modernize Them.

TD Bank’s $3 billion settlement over money-laundering failures has underscored the difficulty banks have in preventing financial crimes. Banking groups say regulators haven’t gone far enough with a proposal to reform the financial system’s safeguards.

By Dylan Tokar. Excerpts:

"financial institutions in the U.S. and Canada last year spent $61 billion on financial crimes compliance.

Meanwhile, critics of the current system question whether it is effective. Instead of spending their resources looking for the worst types of financial crime, financial institutions say they often are forced amid pressure by regulators to focus on the technical aspects of complying with their anti-money-laundering regulations.

During periodic examinations, regulators often take random samples of the cases investigated by a bank’s staff and may question, for example, why they filled out a suspicious activity report in a certain way, or, in some cases, didn’t file one at all.

The upshot of that regulatory scrutiny, financial crimes experts argue, is a check-the-box approach that leads to financial institutions filing millions of suspicious activity reports a year, many of which may have little value to law-enforcement officials. The FinCEN proposal does little to alleviate that kind of regulatory pressure, banking groups say.

Instead, FinCEN’s proposal formalizes a requirement for financial institutions to conduct an assessment that identifies the risks facing their organization. Commentators have pointed out the practice is already widespread in the industry. Making it a requirement—which regulators say will increase consistency across the industry—adds to banks’ regulatory burden since they will then be examined on how well they complete the assessment based on newly formulated standards, according to some industry groups."

CEI comments opposing destructive anti-merger rules from troubled FDIC

John Berlau.

"M&As are in fact, in many cases, a healthy part of capitalism’s competitive process that brings innovation and dynamism to industries and the benefits of greater choices and lower prices to consumers… While small start-ups create many innovations, it is the process of smaller players becoming larger — both through organic growth and mergers and acquisitions — that is often necessary to bring meaningful competition to the biggest players

I then noted that unfortunately, “it is precisely this type of meaningful competition that the FDIC’s policy statement would discourage in the banking sector.” I quoted the comments of former FDIC Chair Sheila Bair and former FDIC Vice Chair Thomas Hoenig that the policy statement would “have a chilling impact on positive M&A banking activity, including among regional banks where consolidation could strengthen their ability to compete with the mega banks.” 

In their comments that I quoted, Bair and Hoenig noted that “rather than improve and clarify its review process” for bank mergers, the policy statement “creates confusion and uncertainty to the process.” They concluded that the result of the policy statement would be to “leave the outcome of a proposed merger unclear and primarily at the discretion of the FDIC and in doing so, makes the process increasingly arbitrary and uncertain.”

I ended my comment by noting that the toxic workplace of the FDIC was not the best atmosphere for consideration of a wide-ranging regulation such as this. Citing Supreme Court Justice Abe Fortas’s admonition in NLRB v. Wyman-Gordon Co., 394 U.S. 759, 764 (1969) that “the rule-making provisions of the Administrative Procedure Act “were designed to assure fairness and mature consideration of rules of general application,” I pointed out that “the workplace environment at the FDIC has not been conducive to a mature consideration of proposed rulemaking.” I concluded that the regulation “should be withdrawn and reconsidered when there is a more favorable environment for reasoned analysis of public policy.”"

Biden Plays Whack-a-Bank With ‘Junk Fee’ Rules

The political price controls will merely shift costs somewhere else and reduce access to credit.

WSJ editorial. 

"President Biden vowed in his State of the Union speech to banish bank and credit-card “junk fees”—i.e., charges that progressives don’t like. If Americans see their credit costs increase, access to credit decline, or card rewards disappear, blame the Administration’s new price controls.

The Consumer Financial Protection Bureau (CFPB) last week finalized a rule effectively capping credit-card late fees at $8, which is about 75% less than the typical past-due charge. Director Rohit Chopra calls these “junk fees”—never mind that governments impose hefty penalties for late tax filings, parking tickets and other things. Are those junk too?

Fifteen years ago, Democrats in Congress authorized financial regulators to limit credit-card late fees at a sum that is “reasonable and proportional” to a borrower’s violation. The Federal Reserve in 2010 capped penalties at $25 ($35 for repeat tardy payments), which are adjusted for inflation. The maximum penalty is now $41.

The CFPB’s rule slashes the cap to $8 and eliminates the annual inflation adjustment. Yet as even the CFPB acknowledges, the lower penalty may cause more borrowers to pay late, and as a result incur higher “interest charges, penalty rates, credit reporting, and the loss of a grace period.” This would make it harder to qualify for an auto loan or mortgage.

The agency concedes that credit-card issuers may also raise interest rates, reduce rewards, “increase minimum payment amounts or adjust credit limits to reduce credit risk associated with consumers who make late payments.” Because some states cap credit-card interest rates, “some consumers’ access to credit could fall.” Thanks, Mr. President.

By the way, the rule comes as credit-card delinquencies have risen to the highest level in more than a decade. Issuers are tightening credit to reduce charge-offs. The rule could force more borrowers to turn to higher-cost credit such as payday loans. Businesses that contract with banks to offer credit cards will also take a hit. Late fees account for between 14% and 30% of department store credit-card revenue. They’ll have to offset the rule’s impact somehow, perhaps with higher prices.

The sprawling damage will be compounded by the CFPB’s proposal in January to cap bank overdraft fees as low as $3. Banks provide overdraft protection up to a limit for a fee as a courtesy to customers. This helps borrowers avoid penalties for late payments. Overdraft protection typically costs less than other forms of short-term credit.

In recent years the biggest banks have eliminated or reduced overdraft fees to compete with fintech firms. Overdraft fees account for less than 2% of U.S. commercial banking revenue. According to the CFPB, market-wide overdraft revenue fell in real terms by 37% between 2019 and 2022. What do you know? Market competition helps consumers.

The cap on overdraft fees could spur banks to raise other charges, the CFPB acknowledges. Some might impose “nonsufficient fund fees” when they reject debit-card purchases and ATM withdrawals that overdraft accounts. So the agency proposes banning those too.

***

The big picture here is that the Administration is playing whack-a-bank, hitting this and that revenue stream as another arises, and turning banks into regulated utilities. Consumers are the biggest losers, as we’ve learned from other such price controls.

The Durbin Amendment to Dodd-Frank directed the Fed to limit fees charged to retailers for debit-card processing. A 2017 Federal Reserve staff study found that as a result larger banks reduced free checking and raised minimum balance requirements. Small banks not subject to the cap also limited free checking because they faced less competition. Rather than lower prices, retailers pocketed the savings.

Now the Fed has proposed a rule that would reduce the maximum debit interchange fee banks can charge merchants—to 17.7 cents from 24.5 cents on a $50 debit transaction. As Fed Governor Michelle Bowman noted, “one consequence may be that banks discontinue their lowest-margin products” designed to increase banking access for lower-income Americans.

The Biden Administration is playing up its price controls as an election-year gambit, but it never explains the unseen effects down the road. The forgotten man always pays."

Capping Overdraft Fees Could Actually Hurt Poor Families

By Megan McArdle. Excerpt:

"I’m worried this move might end up hurting some of the very people it’s supposed to help: low-income Americans on the fringes of the banking system.

These people are far and away the heaviest users of bank overdrafts. The Financial Health Network, a personal finance nonprofit, says the group most likely to overdraft includes “financially vulnerable” households that struggle to pay their bills every month and typically make less than $30,000 a year. Almost half of financially vulnerable households with checking accounts overdrafted in 2022, and of that group, two-thirds overdrafted at least three times, one-third did so six or more times, and one-fifth overdrafted 10 times or more. With an average overdraft fee of $26.61, hundreds of dollars in fees can land on the most cash-strapped customers. Capping those fees — possibly as low as $3 — would be a huge boon to families who really need the help. Who could oppose that?

Well, as with any nice-sounding policy, it’s important to consider the alternatives, both for the customer and for the banker.

For depositors, overdraft fees can be an expensive alternative to even worse options, such as payday loans or having their electricity shut off (and paying a reconnection fee to turn it back on). And “the best of bad alternatives” can also be sort of true for bankers, who must find some way to defray the cost of providing what is basically an unsecured loan to people who are, as we’ve seen, often financially struggling and might be unable to repay the money. The fees also help pay for “free” checking (which costs banks quite a bit of money to provide).

If we cap overdraft fees, how will banks make up the lost revenue?

From profits, you say, and fair enough, but Patrick McKenzie, who writes the Bits About Money newsletter, points out that the reason your bank is so obsessed with getting you to sign up for paperless statements is that the profit margins on checking accounts are so thin, they can be meaningfully improved by saving the cost of 12 stamps a year. “Margins on small bank accounts are very thin,” he wrote recently, and “credit losses can easily be larger than several years of them.”

Now the government wants to make those accounts even less profitable. It seems possible banks would look to limit their losses by getting rid of those customers or making up the revenue somewhere else — or possibly both. This seems to have happened in the past, judging from what we saw when federal regulators preempted some state fee caps in 2001. According to researchers from the New York Fed, the exempted banks both raised overdraft fees and expanded available overdraft credit, while lowering minimum balance requirements. The rate at which checks were returned for insufficient funds declined by 15 percent. And the share of low-income households with a bank account rose by 10 percent, suggesting that minimum balance requirements had kept those households from opening accounts.

That doesn’t mean that no one would benefit from this rule. High overdraft fees can also deter people from opening a bank account, and it’s possible that effect would outweigh any contraction of credit. The financial industry has also changed a lot since 2001, with nonbank alternatives, such as Cash App, that might offer the marginal bank customer a better replacement than an old-fashioned check-cashing store. But there would still likely be winners and losers, and I don’t know whether the former’s gains would outweigh the latter’s losses. I’m not sure the administration does, either."

The Fed Launched a Bank Rescue Program Last Year. Now, Banks Are Gaming It.

Borrowing at the bank term funding program is up to record highs but not because of new stresses

By David Benoit and Eric Wallerstein of The WSJ. Excerpts:

"An emergency lending program the Federal Reserve created during the 2023 banking crisis has turned into easy money."

"The rate banks pay to use the program, BTFP for short, is tied to future interest-rate expectations. Now that investors have priced in a series of rate cuts later this year, banks are able to pocket the difference between what they pay to borrow the funds and what they can earn from parking the funds at the central bank as overnight deposits."

"The facility charges banks a rate equivalent to the market’s expectation for where benchmark interest rates average over the next year, plus an additional 0.1 percentage point. Initially, borrowing was expensive because investors were pricing in higher rates in the future."

"While the Fed offers financing below 5% through its rescue program, it is currently paying banks 5.4% on parked reserve balances."

"It appears more likely the banks are just taking the easy money.

“We think banks are exploiting a positive arbitrage,” Janney Montgomery Scott analyst Christopher Marinac wrote in a note this week."

The private mint in economics: evidence from the American gold rushes

By Lawrence H. White.

"Abstract

Prominent economists have supposed that the private production of full-bodied gold or silver coins is inefficient: due to information asymmetry, private coins will be chronically low-quality or underweight. An examination of private mints during gold rushes in the US in the years 1830–63, drawing on contemporary accounts and numismatic literature, finds otherwise. While some private gold mints produced underweight coins, from incompetence or fraudulent intent, such mints did not last long. Informed by newspapers about the findings of assays, money-users systematically abandoned substandard coins in favour of full-weight coins. Only competent and honest mints survived."

The Decline and Fall of the Federal Home Loan Banks

By Nicholas Thielman of Cato.

"Though often ignored, the various loan and credit guarantees provided by the federal government via a series of off‐​budget enterprises are an insidious threat to American taxpayers. The oldest of these is the Federal Home Loan Bank (FHLB) system, a government‐​sponsored enterprise (GSE) created to support the housing market.

Since its foundation, the FHLBs have come to support more than just housing. The system’s mission creep, combined with the various privileges it enjoys from the federal government, has allowed it to cater to special interests and to inject moral hazard into the broader financial system. The system puts taxpayers at risk and should, at the least, be privatized if not eliminated.

The FHLB system, for those unfamiliar, was founded before the New Deal. It was the brainchild of Herbert Hoover, who hoped to promote homeownership while supporting the Savings and Loan industry through the turmoil of the Great Depression. Established in 1932, the system was modeled after the Federal Reserve, with twelve regional banks cooperatively owned by the various financial institutions within their respective districts. Its membership was initially restricted to savings and loan associations (thrifts), financial institutions that specialized in mortgage lending.

At first, the FHLB system only provided low‐​cost loans to thrifts to aid their mortgage origination. Over time, though, the system expanded to lend to commercial banks to support all kinds of lending. Recently it provided loans to Silicon Valley, Signature, and First Republic Banks, only one of which was connected to mortgage lending and even then only to a wealthy clientele.

Much like its younger siblings, Fannie and Freddie, the FHLBs enjoy a $4 billion credit line with the Treasury Department, and their debt is eligible for purchase by the Federal Reserve. Additionally, the system’s earnings and dividends are exempt from federal, state, and local taxes. Unique to the FHLBs is its “super lien” status which places it ahead of other creditors, including the FDIC, for getting paid back should a bank they lend to collapse.

These privileges allow the FHLBs to borrow from investors at near‐​Treasury rates, the proceeds of which are then lent to member institutions at below‐​market rates against eligible mortgage assets. Of course, lending rates charged by the FHLBs are still above the rates at which they borrowed, allowing them to earn substantial profits from these operations. These privileges mean that many market participants expect, correctly or not, that the federal government would stand behind the system’s debt.

These privileges also provide a sizable subsidy to member institutions, estimated at being between $6–9.3 billion per year. Such a lucrative subsidy has attracted the attention of a variety of industry and interest groups, including large financial institutions and community development and housing advocacy groups, all eager for a slice of government largesse.

Thus, through a combination of lobbying and advocacy by the system’s leadership (including at one point its regulator) the system has been allowed to expand well beyond the boundaries of its original purpose.

Starting in 1989 a series of system expansions was log‐​rolled through Congress with bipartisan support, resulting in commercial banks, federal and non‐​federal credit unions, and community development financial institutions all gaining eligibility for system membership. In exchange for allowing these players access to the system’s facilities, the FHLBs were also tasked with providing support to affordable housing and community development programs.

Thus, each district FHLB is required to contribute 10 percent of its profits to fund the construction of affordable housing projects. The system also provides incentives in the form of discounted loans for member institutions to invest in housing or community development projects in low‐​income areas. Lastly, many regional FHLBs operate mortgage purchase programs for which a target percentage must have been originated for low‐ to medium‐​income households. Even more recently, the FHFA has announced plans to include climate resiliency requirements into the system’s lending programs.

The fact that all the FHLBs’ operations are off the federal government’s balance sheet means that politicians have less accountability than that which comes with regular congressional appropriations.

The primary beneficiaries of the system’s mission creep have not been homeowners, but rather a handful of large banks who have routinely received the majority of the loans made by the banks. At the end of 2019, for instance, the ten largest members of the system accounted for 30 percent of its lending, with Wells Fargo and JPMorgan Chase accounting for most of this increase. These loans supported a variety of lending activities, not just home mortgages. Low‐​income homebuyers have also benefitted from direct subsidies as the system expanded. But there has been no sustained increase in the rate of homeownership and housing itself has not become more affordable.

The FHLB system also creates a great deal of moral hazard. For example, the system’s structure creates incentives for risk‐​taking while simultaneously reducing the incentives of the banks’ bondholders and shareholders to monitor and constrain risky behavior. Two prime examples are the implicit guarantee of the system’s debt by the federal government and its “super lien” status. Bondholders understand these privileges as a signal that they are highly likely to be made whole if ever in danger of financial failure.

On the flip side, shareholders and FHLB executives stand to earn substantial profits from bank risk‐​taking. In 2022 the CEO of the San Francisco FHLB earned $2.4 million, a substantial portion of which was bonuses tied to growth in the bank’s lending. The effect of these perverse incentives has been that the FHLBs have made loans to failing institutions and have failed to properly manage their own risk‐​taking.

Taxpayers are the ultimate bearers of the system’s risk‐​taking, both through the implicit guarantee of FHLB debt, and the regular bank resolution process. To reduce the risks both to taxpayers and the broader financial system, the FHLBs should be privatized, if not eliminated.

To privatize the FHLBs, Congress should revoke their charters, thereby subjecting them to greater market discipline and greater incentives to constrain risk‐​taking. By removing these privileges, the distortions created by this New Deal relic can be eliminated."

Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985

By MARIANNE BERTRAND, ANTOINETTE SCHOAR, and DAVID THESMAR. Authors are, respectively, at University of Chicago Graduate School of Business, National Bu- reau of Economic Research, Centre for Economic Policy Research, and Institute for the Study of La- bor; Massachusetts Institute of Technology, National Bureau of Economic Research, and Centre for Economic Policy Research; HEC School of Management and Centre for Economic Policy Research.

"ABSTRACT 

We investigate how the deregulation of the French banking industry in the 1980s affected the real behavior of firms and the structure and dynamics of product markets. Following deregulation, banks are less willing to bail out poorly performing firms and firms in the more bank-dependent sectors are more likely to undertake restructuring activities. At the industry level, we observe an increase in asset and job reallocation, an improvement in allocative efficiency across firms, and a decline in concentration. Overall, these findings support the view that a more efficient banking sector helps foster a Schumpeterian process of “creative destruction.”"

Punishing Banks for Regulatory Failure

Regulators want to saddle midsize banks with new capital rules

WSJ editorial. 

"Silicon Valley Bank failed owing to rising interest rates and lapses by regulators, not a shortage of capital. Yet regulators are using the spring banking panic to justify cumbersome new capital rules that could make the financial system more vulnerable.

The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency recently proposed a 1,087-page rule that would raise capital requirements on average by 16% for midsize and large banks. Strong capital levels help protect taxpayers, and we favor them when they are clear and simple. But as Fed Chair Jerome Powell noted in a statement, the potential costs of boosting capital requirements at the current moment could exceed the benefits. 

Some 30 banks with more than $100 billion in assets would be covered by the proposed standards, which effectively nullify Congress’s 2018 bipartisan banking reform that liberated midsize banks from too-big-to-fail rules. That’s the clear political intent of the rule. Flagstar Bank would have to comply with the same capital requirements under the rule as JPMorgan even though it’s 1/25th the size.

Banks would have to hold more capital to account for their “operational” risks such as regulatory penalties, lawsuits and cyber-attacks. The capital charge would be based on a proxy for a bank’s size and past losses from operational problems. Regulators could thus dun banks twice—first with a fine and then by requiring them to hold more capital for future penalties.

The proposal would also impose higher capital requirements for risks from trading, which would be standardized across banks. Banks would have to hold more capital if they engage in activities that regulators deem riskier. That sounds sensible.

But as Mr. Powell explained in a statement, it could spur large banks to reduce market-making activities, “threatening a decline in liquidity in critical markets and a movement of some of these activities into the shadow banking sector.” Regulators no doubt will then try to expand their purview over hedge funds, private equity and other nonbanks that fill the market gap, as they did during the Obama years.

The rule’s risk-weighting regime for trading would also encourage herd behavior and increase regulatory arbitrage. That’s what happened before the 2008 financial panic as banks loaded up on mortgage-backed securities because they were deemed risk-free by regulators. You know how that turned out.

Banks already must comply with numerous overlapping capital regimes, and the Fed proposal would add another at a time of great economic uncertainty. After Moody’s downgraded the credit rating of 10 midsize banks this week and placed six under review, bank bonds took a beating. Tougher capital rules will cause banks to reduce “risk-weighted assets” and lending if raising new capital is too expensive.

Another is that the rules divert bank managers’ attention from actual risk-management, which is what appears to have happened at Silicon Valley Bank. Fed Vice Chair for Supervision Michael Barr’s report on SVB noted that bank managers and supervisors spent “considerable effort seeking to understand the rules and when they apply.”

Yet none of the three banks that failed would have been required to hold more capital under the proposed rules. While the capital charges for trading would hit investment banks hardest, it’s hard to predict exactly how the convoluted rule would affect credit and markets.

To underline the potential for unintended consequences, Republican FDIC Board Member Jonathan McKernan gave the example of a bank that incurs a large regulatory penalty for a consumer compliance problems. As a result, the bank would be subject to lower capital requirements for some residential real-estate and retail exposures.

One certainty is that higher compliance and capital costs will disproportionately burden midsize banks. This will make them less competitive with the giants and increase their incentive to merge to get bigger. But Fed regulators won’t let them merge as long as Treasury Secretary, er, Sen. Elizabeth Warren is looking over their shoulders.

The more regulators try to punish big banks, the more they punish their competitors—and Americans who will ultimately pay for blunderbuss regulation one way or another."