Did the Plaza Accord Cause Japan’s Lost Decades?

Paper from the IMF.  

"The rebalancing debate has sparked renewed interest in Japan’s experience since the 1980s. Some argue that this is a cautionary tale, exemplifying the dangers of reorienting economies through currency appreciation (People’s Daily, 2010). They claim that the appreciation of the yen after the Plaza Accord forced the authorities to introduce an offsetting macroeconomic stimulus, which then led to an extraordinary asset price boom followed by an extraordinarily painful bust. Japan was one of the world’s fastest-growing economies for three decades but has averaged only 1.1 percent real GDP growth since 1990, while prices have steadily declined. Consequently, the size of Japan’s economy today is about the same as in the early 1990s. The sequence of events is clear and striking. But there are reasons to doubt that it was truly inevitable, whether the Plaza Accord was really the direct cause of Japan’s “Lost Decades.” 

What Happened? 

The events began in September 1985, when delegates from the G5 countries met at the Plaza Hotel in New York, declared the U.S. dollar overvalued, and announced a plan to correct the situation.1 The essence of the plan was that the main current account surplus countries (Japan and Germany) would boost domestic demand and appreciate their currencies. In effect, this agreement marked a major change in policy regime: the Federal Reserve was signaling that after a long and successful fight against inflation, it was now prepared to ease policies, allow the dollar to decline, and focus more on growth. This signal was backed by coordinated currency market intervention and a steady reduction in U.S. short-term rates. Accordingly, it triggered an exceptionally large appreciation of the yen, amounting to 46 percent against the dollar and 30 percent in real effective terms by the end of 1986. (The deutsche mark appreciated similarly.) As a result, Japan’s export and GDP growth essentially halted in the first half of 1986. With the economy in recession and the exchange rate appreciating rapidly, the authorities were under considerable pressure to respond. They did so by introducing a sizable macroeconomic stimulus. Policy interest rates were reduced by about 3 percentage points, a stance that was sustained until 1989. A large fiscal package was introduced in 1987, even though a vigorous recovery had already started in the second half of 1986. By 1987, Japan’s output was booming, but so were credit growth and asset prices, with stock and urban land prices tripling from 1985 to 1989. Then, in January 1990, the stock price bubble burst. Share prices lost a third of their value within a year, and two decades of dismal economic performance followed (Figure 1.4.1). Today, nominal stock and land prices are back at their early 1980s levels, one- quarter to one-third of their previous peaks.

The critical question is whether this sequence was inevitable. In other words, did the appreciation force Japan to introduce a powerful stimulus to sustain growth, which then triggered a bubble, which caused the Lost Decades when it collapsed? Let’s consider each step in turn. 

Was Such a Large Stimulus Needed? 

Studies suggest that, in fact, the monetary policy easing may have been excessive. Estimates by Jinushi, Kuroki, and Miyao (2000) and Leigh (2010), among others, suggest that the policy rate was up to 4 percentage points too low during 1986–88 relative to an implicit Taylor rule based on the output and inflation outlook. Why, then, did the central bank sustain such a policy? A key reason is that current inflation remained reasonably well behaved, which led some economists to argue that soaring growth rates did not represent a cyclical boom but rather a “new era” of higher potential growth. This growth was particularly gratifying because it was led by domestic demand, a key commitment under Plaza. 

But IMF reports at the time suggest another factor was also at work. The authorities worried that higher interest rates would further strengthen the yen and feared that appreciation would eventually have serious effects on the economy. In the end, external demand did indeed diminish. But it did not collapse. Real exports continued to grow in the five years after Plaza, by an average of 2½ percent a year (half the rate of the previous five years), while the current account surplus diminished by a moderate 2 percentage points of GDP. (Similarly, Germany’s currency appreciation failed to derail its export or GDP expansion, even with a smaller monetary response.) Put another way, excessive stimulus was adopted in part because there was excessive concern about the impact of appreciation. 

Did the Stimulus Cause the Bubble? 

Although the monetary easing was certainly large, it is far from clear that it alone was responsible for the asset price bubble. Chapter 3 of the October 2009 World Economic Outlook and Posen (2003) have examined the link between monetary policy and asset price booms in advanced economies over the past 25 years. They conclude that policy easing is neither necessary nor sufficient to generate asset price booms and busts. In Japan’s case, two other elements seem to have played a large role. As Hoshi and Kashyap (2000) explain, financial deregulation in the 1970s and early 1980s allowed large firms to access capital markets instead of depending on bank financing, leading banks to lend instead to real estate developers and households seeking mortgages. As a result, bank credit to these two sectors grew by about 150 percent during 1985–90, roughly twice as fast as the 77 percent increase in overall bank credit to the private sector. Finally, because the dangers of real estate bubbles were not well understood in those years, the Japanese government did not deploy countervailing regulatory and fiscal policies until 1990. 

Did the Bubble’s Collapse Cause the Lost Decades? 

The aftermath of the bubble proved extraordinarily painful for Japan. But the collapse of a bubble does not inevitably have such powerful and long-lasting effects. What was special about Japan’s case? A key factor was the buildup of considerable leverage in the financial system, similar to what occurred in the United States before 2008. Tier 1 capital of Japanese banks in the 1980s was very low, much lower than elsewhere, as global standards (the Basel I accord) had not yet gone into effect. Moreover, much of the collateral for loans was in the form of real estate, whereas under the keiretsu system a significant portion of bank assets consisted of shares in other firms from the same group. So, when real estate and share prices collapsed, the banking system was badly damaged.

This underlying vulnerability was exacerbated by a slow policy response. The authorities delayed forcing banks to recognize the losses on their balance sheets and allowed them to continue lending to firms that had themselves become insolvent, a process Caballero, Hoshi, and Kashyap (2008) call “zombie lending.” This process continued into the early 2000s, stifling productivity growth and prolonging Japan’s slump. Why did the authorities not force faster restructuring? Possibly because restructuring would have required additional bank capital, which they were not in a position to provide in light of the strong political backlash after an initial injection of public capital in 1995. Consequently, the authorities exercised forbearance instead. 

The postbubble slump may also have been exacerbated by the macroeconomic policy response and adverse external shocks. Some argue that premature monetary tightening and the lack of a clear commitment to raising inflation led to unduly high real interest rates (Ito and Mishkin, 2006; Leigh, 2010). In addition, the tightening of fiscal policy in 1997 may have undercut the nascent 1995–96 recovery (Posen, 2003; Corbett and Ito, 2010). Finally, adverse external shocks played a role, including the 1997–98 Asian financial crisis. 

In sum, Japan’s experience shows that currency appreciation does not, in fact, inevitably lead to “lost decades.” The appreciation did not inevitably require such a large macroeconomic stimulus. The stimulus did not inevitably lead to the bubble. Nor did the bubble’s collapse inevitably lead to the Lost Decades. Instead, it was the particular combination of circumstances and choices that led to that result.

Lessons for Rebalancing Today 

Calibrating a policy response to exceptionally large appreciations and movements in asset prices remains an extraordinarily difficult task. But some pointers can be gleaned from Japan’s experience. The keys are to

• avoid an excessive macroeconomic response to currency appreciations; 

• use prudential policies to prevent vulnerabilities from building up, especially in the form of leverage; 

• address banking problems quickly if they do materialize; and 

• provide significant macroeconomic support when banking systems and economies come under stress.

An even broader lesson is that bubbles can prove dangerous. Accordingly, Japan has introduced a two- perspective framework for monetary policy, with one pillar focusing on price stability and the other looking out for financial imbalances such as asset price bubbles. 

But even as Japan’s experience offers lessons to countries considering rebalancing today, the direct parallels are limited. Most notably, circumstances in China today differ from those in Japan in the 1980s in ways that should help it avoid Japan’s disappointing outcomes (Figure 1.4.2). First, the leverage of households, corporations, and the government in China is lower now than it was in Japan before the bubble (N’Diaye, 2010), and the risk of excessive borrowing may thus be smaller. Second, as Chapter 4 of the April 2010 World Economic Outlook and Igan, Fabrizio, and Mody (2007) find, climbing the quality ladder helps offset the impact on growth of currency appreciation, and China has more room to climb the export quality ladder than Japan did. (At the same time, the impact on labor-intensive industries may be greater.) Third, Japan had a floating exchange rate regime in the 1980s, but China has a managed exchange rate supported by vast foreign currency reserves and strong restrictions on capital inflows. This difference in currency regimes should help China avoid the sharp appreciation observed in Japan. Most important, China should be able to reap the benefits of learning from Japan’s experience."

 

How to Shrink Credit for the Poor

Like Bernie Sanders and AOC, Trump wants to fix prices on credit cards.

WSJ editorial. Excerpts:

"Credit-card rates are set by markets. They are based largely on the Federal Reserve’s benchmark interest rate and borrower risk. Restricting rates will limit access to credit for lower-income Americans. That’s what price controls do: They limit supply."

"The average annual percentage rate (APR) rose to 24.9% from 19.3% between 2021 and 2024 as the Fed raised interest rates to control inflation. The average APR has since ticked down to about 23.8% after the Fed cut rates last year."

"Rates on credit cards are higher than on auto and home loans because they aren’t secured by property."

"Those with lower credit scores are charged higher rates to compensate for their greater risk of default. Rising delinquencies have contributed to higher rates. About 12.4% of credit-card balances were severely delinquent in last year’s third quarter, about the same as in the 2008-09 recession."

"Capping rates at 10% would inevitably force issuers to slash rewards and curtail credit. The latter is what happened after Democrats in 2009 restricted the kind of fees that credit cards could charge and when they could raise rates. A paper by the Philadelphia Fed concluded the 2009 law “likely had an adverse effect on non-prime borrowers.”"

"Studies have also found that lenders restricted credit in states like Arkansas and Illinois after they capped interest rates."

[people then] "may turn to payday loans that charge even higher rates." 

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."

 

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"

Gov. Youngkin should veto restrictive credit bill

By Patricia Patnode of CEI. 

"In our evolving financial technology landscape, Virginia Senate Bill No. 1252 poses a threat to credit access in Virginia. The bill aims to change sections of the Code of Virginia related to interest payments and recently passed both the state House of Delegates and the state Senate. Unless Gov. Glenn Youngkin vetoes this bill, soon Virginia residents might lose access to credit and useful purchasing and budgeting tools such as Buy Now Pay Later (BNPL). And progressive leftists championing the bill will likely attempt to spread its misery through similar state legislation in the rest of the country.

The bill would implement in Virginia one of the most restrictive interest-rate caps in the country, according to the National Consumer Law Center, the Boston-based progressive advocacy group that is one of the main champions of this legislation. The bill’s broad scope is problematic for many reasons, including its disproportionate harm to smaller banks.  Many rural and community banks, for instance, partner with fintech firms to originate loans. Big banks, by contrast, don’t need to partner with fintechs, as they have the resources to build their own financial technology infrastructures. By restricting third-party partnerships, the bill would lock smaller banks out of offering loans and other financial products.

Currently, Virginia law states that “[e]xcept as otherwise permitted by law, no contract shall be made for the payment of interest on a loan at a rate that exceeds 12 percent per year.” However, the law provides a long list of exceptions to this regulation, so that the 12 percent cap is largely inapplicable to many loan agreements. For example, a standard credit card annual percentage rate (APR) is typically double the 12% cap, which is why there is a noted exception for “revolving credit account” (credit cards).

SB 1252 doesn’t cap credit card interest rates. However, it does take a swing at other types of financial technologies. The bill’s broad language seemingly captures all third-party financial vendors which have previously been excluded from the 12 percent law. Concerningly, the imprecise language leaves a significant amount of discretion to a regulator rather than clearly identifying what types of financial activities and means of transaction the Virginia legislature would like limited.

Some banks have started to integrate BNPL into their existing menu of financial services, which calls into question how the usury law changes would be applicable to this type of loan. BNPL platforms have offered much-needed competition to traditional leasing agreements or layaway options, which is likely why the number of people using BNPL to shop has dramatically increased in recent years. BNPL is generally advertised as a “pay in four” installment plan with 0 percent interest if payments are made on time.

Yet because there is not explicit exemption in the bill for BNPL – as there is for other financial products and services – Virginia entrepreneurs have expressed concern that the bill could cripple this innovation. Each BNPL service has a slightly different customer agreement, and repayment schedule. Some charge late fees for failing to complete the agreed upon installment plan, and some charge interest. The likelihood that a regulator could decide these charges and fees are subject to the 12 percent cap could mean that bank and fintech firms will stop providing BNPL to consumers in Virginia.

BNPL vanishing from Virginia due to this bill would deprive consumers of a valuable tool to manage their debt. A 2023 report from the Consumer Financial Protection Bureau (CFPB) showed that BNPL users pay off their bills reliably, with only 10.5 percent of users ever being charged a late fee and only 3.8 percent of fees considered charge-offs. This responsible borrowing is built into the product by design, as BNPL services are often linked to debit cards, ensuring that consumers only spend money they have. This approach has resulted in a 99 percent repayment rate and losses below the credit card industry standard. It’s also worth noting that banks are already highly regulated by the Federal Office of the Comptroller of the Currency (OCC), The Federal Reserve System, and the FDIC.

In a testimony to the Virginia House about this bill, The American Fintech Council (a trade group for fintech firms) testified that in, “2024, [American Fintech Council] members made more than 204,000 loans and lent more than $785,637,981 in total to Virginia borrowers. The average loan amount was $7,512.” If this bill goes into effect and loan options in Virginia become more limited, consumers will either forgo certain purchases or substitute with other credit options, such as credit cards, payday lenders or pawn shops.

Limiting consumer credit choices with SB 1252 won’t help Virginians be better with money or protect them from predatory lenders. By imposing new, stringent regulations on banks and fintech companies, the bill could disrupt beneficial partnerships and hinder the growth of financial technology tools and leave consumers out of options when they need them the most. Gov. Youngkin should veto SB 1252 to protect Virginia’s financial ecosystem, encourage innovation, and ensure that consumers continue to have access to flexible and responsible credit options."

Abolish the CFPB

This rogue agency stifles innovation, drives up costs, and infantilizes consumers—all while operating without accountability

By Veronique de Rugy. 

"Picture this: a government agency that operates with little accountability, spends taxpayers' money without congressional oversight, and enforces regulations based on flimsy theories about consumer behavior. That's the Consumer Financial Protection Bureau (CFPB), an institution so misguided in both mission and execution that it does not deserve mere reform—it should be abolished outright.

Heralded as the savior of consumers after the 2008 financial crisis, the CFPB has instead become a regulatory monster that stifles innovation and drives up costs for the very people it claims to protect.

When the CFPB was created, Congress transferred authority to it for approximately 50 existing rules and orders coming from 20 different statutes. For fiscal year 2024, it has an estimated budget of $762.9 million, a 9.5 percent increase from the previous year. The agency's funding structure allows it to operate independently of the congressional appropriations process: The bureau's budget is funded through transfers from the Federal Reserve System.

This funding mechanism has been a point of contention, with critics pointing out that it grants the agency excessive autonomy and insufficient accountability. In October 2022, the Fifth Circuit Court ruled the funding structure unconstitutional, but the U.S. Supreme Court reversed this decision in May 2024.

The CFPB isn't just unaccountable—it's practically untouchable. Because it receives its funding directly from the Federal Reserve rather than from Congress, it operates outside the normal checks and balances that keep most government entities in line. The agency isn't even required to comply with Office of Management and Budget guidelines. Even the agency's leadership structure was designed to concentrate power: Until the Supreme Court stepped in, it was headed by a single director with sweeping authority and little oversight.

What was the CFPB given all this power to do? In theory, it is to protect and empower consumers, promote fair and competitive markets, and stabilize the financial system. In practice, it has reduced access to credit cards for lower-income consumers and jacked up bank fees and mortgage costs. CFPB bureaucrats also love price controls and excessive regulations, and they despise financial arrangements that they view as unconventional.

At the heart of the CFPB's misguided decisions is its leaders' apparent belief that consumers are helpless, irrational beings incapable of making good financial decisions without bureaucratic intervention. Armed with this condescending mindset, the CFPB justifies heavy-handed regulations based on what George Mason University professor Todd Zywicki calls "trendy behavioral-economics theories to 'nudge' consumers toward decisions central planners favor." The CFPB dreams up consumer biases and creates rules to fix problems that often don't even exist. Instead of relying on empirical evidence of actual harm, the CFPB crafts policies based on theoretical assumptions.

If you're looking for clarity and consistency in regulation, don't look to the CFPB. This agency makes policy on the fly, using enforcement actions rather than clear rules. Imagine playing a game where the referee keeps changing the rules mid-play. That's what financial institutions face, and the costs of this uncertainty inevitably land on consumers in the form of higher fees, reduced access to credit, and fewer financial options.

Take the bureau's mortgage regulations. Designed to protect borrowers, these rules ended up making it harder to qualify for loans if you are self-employed or have non-traditional sources of income, ultimately pushing these borrowers toward non-qualified mortgage loans and higher rates. Then there's the agency's crackdown on credit card fees. Paying less in fees may have sounded good, but it led to higher interest rates and fewer card options for lower-income consumers. And in the payday lending industry, the CFPB's meddling has pushed vulnerable consumers toward predatory alternatives.

The CFPB isn't just it's broken—it's often redundant. Existing agencies like the Federal Trade Commission and state regulators already police fraud and try to ensure transparency. What does the CFPB's heavy hand add?

Rather than pouring more resources into this bureaucratic black hole, especially one that duplicates the work of other agencies and programs, officials should cut their losses and abolish the CFPB. Let's return to a system based on clear disclosure requirements, competitive markets, and the enforcement of fraud laws. Consumers should be empowered, not infantilized."

You Say You Want Fintech Competition, You Better Free Your Market

By Jack Solowey of Cato. 

"When thinking of tech antitrust, the Biden administration’s quixotic campaign against the likes of Meta, Google, and Amazon probably comes to mind. But in addition to suits against big-name Internet platforms, the Justice Department filed an antitrust case this fall against a decidedly more retro network: Visa.

According to the September 24, 2024 complaint, Visa’s debit card network being “everywhere you want to be” is cause for concern because, the DOJ alleges, the company maintains its US market leadership (over 60 percent of debit payments) through anti-competitive contracts with banks, merchants, and fintech companies. In the words of the DOJ, Visa “uses its dominance to limit the growth of existing competitors and to deter others from developing new and innovative alternatives.”

Sorry, but paeans to the virtues of competition and innovation in payment technology are rich coming from the federal government. This same government has all-too-merrily erected and aggressively enforced its own barriers to payment alternatives. What’s more, the government’s own misguided interventions in the debit card market are arguably at the root of the alleged activity it now complains about.

The course of the DOJ’s case remains to be seen. But regardless of its outcome, the federal government’s approach to competition in payments requires significant course correction. If the government truly wants to unleash payment competition and fintech innovation in the United States, it should start by rolling back its campaign against both.

The Debit Card Market

The DOJ’s first broad claim is that Visa hampers competition from other debit card providers through exclusionary contracts with issuing banks (who issue debit cards on Visa’s network) and acquirers (who accept payments for merchants). Yet even if one took the DOJ’s allegations at face value, the federal government’s distortionary policy interventions likely would be an underlying cause.

Indeed, the DOJ argues that Visa’s alleged contracting practices are a response to a portion of Dodd-Frank known as the Durbin Amendment. The Durbin Amendment, along with its implementing regulation from the Federal Reserve (Regulation II), is perhaps best known for capping the processing fees (interchange fees) that debit card-issuing banks can charge to merchants/​acquirers accepting debit payments. In addition to fee caps, the Durbin Amendment also requires debit cards to support payments routed over at least two different networks. (The Credit Card Competition Act—a new bill by Senator Durbin (D‑IL)—would apply similar requirements to the credit card industry.)

To understand the Durbin Amendment’s routing requirement, it helps to look at a physical debit card. In addition to your bank’s (or credit union’s) logo, the front of your debit card will likely have the logo of the payment card network (e.g., Visa or Mastercard) that your bank contracts with to exchange transaction information with your merchant’s bank. Following the Durbin Amendment, your debit card also would be required to support payments over an additional network that’s unaffiliated with the primary “front-of-card” provider. If you flip over your debit card, you may see the logo of one of these additional networks (e.g., STAR, Pulse, NYCE, etc.).

According to the DOJ, Visa consigns these “back-of-card” networks to a less-than-second-class status by writing contracts with issuers and acquirers that restrict and disincentivize routing more than a de minimis portion of transactions through the alternatives.

At first glance, the Durbin Amendment’s back-of-card network requirement may appear to be a pro-competitive policy. But good intentions notwithstanding, the policy does little to improve (and likely harms) consumer welfare due to its fundamental misunderstanding of the nature of the payment card market.

A payment card network is what’s known as a two-sided market. This means that for a network to be useful, it must have a critical mass of two types of users: consumers and merchants. Without enough of either, the network is far less valuable to the other: think Uber with either too few drivers or riders. As the Supreme Court put it—when finding in favor of American Express in a 2018 antitrust case—a payment card is “more valuable to cardholders when more merchants accept it, and is more valuable to merchants when more cardholders use it.”

Achieving that critical mass of consumers and merchants is no small feat. It involves investing in secure and effective technology, as well as marketing to reach users on both sides of the market. The problem with the Durbin Amendment’s mandate is that it allows the back-of-card network to freeride on the investments and brand equity of the front-of-card network.

For example, a front-of-card network may earn its place on the card in a consumer’s wallet through various features (like robust security) that won the trust of the consumer’s bank, which, in turn, won the trust of the consumer. That network will seek to recoup the cost of those features with a commensurate merchant/​acquirer fee model. Under the Durbin Amendment’s vision, however, a back-of-card network could get the benefit of being in the consumer’s wallet—the chance to win a merchant’s routing business—without necessarily offering the same features as the front-of-card network. Indeed, if the back-of-card network wants that routing business, there’s a good chance it may try to undercut the front-of-card network with a different strategy, such as fewer features but lower merchant/​acquirer fees. 

There’d be nothing wrong about that tradeoff if that’s what the consumer and her bank had freely chosen. But the Durbin Amendment ignores the full weight of their actual choice by mandating that a second-choice network (at best) gets to ride alongside the consumer’s first-choice network in her wallet. Carrying second-place competitors to unearned first-place finishes by fiat is an inferior substitute for real competition.

What’s more, the Durbin Amendment appears to be an overall policy failure, resulting in additional bank fees for consumers. As Ronald Bird writes in Regulation:

The preponderance of the post-regulation literature suggests that the 2011 regulation did not achieve its goals of lowering merchant fees and increasing debit card usage. Instead, the regulation increased checking account fees, increased minimum deposit requirements for free checking, increased ATM fees, reduced or even eliminated consumer rewards programs, and reduced the overall level and growth trend of debit card use.

While much of this counterproductive result is attributable to the Durbin Amendment’s interchange fee caps, as Julian Morris and Todd Zywicki point out, similar effects also stem from back-of-card network mandates. Examining data from credit unions and community banks that were subject to back-of-card mandates but not fee caps, Morris and Zywicki conclude that “the Durbin Amendment’s routing requirements have reduced interchange-fee income and raised costs for exempt banks and credit unions, which have responded by increasing fees and reducing benefits (such as debit-card rewards).”

There’s a reasonable argument, therefore, that a payment card network finding a workaround to the poor policy prescriptions and distortionary interventions of the Durbin Amendment would be, on net, consumer welfare enhancing.

Fintech Competition

The DOJ’s second broad claim against Visa is that it suppresses competition from fintech alternatives (like Apple Pay, Cash App, and PayPal) by conditioning those apps’ compatibility with Visa cards on the providers limiting their use and development of non-Visa payment rails.

Ironically, in this domain, the government’s argument recognizes the value of networks and nature of two-sided markets. Specifically, the DOJ contemplates how fintech providers could leverage their established relationships with consumers and merchants to attempt to scale their own interbank payment arrangement that disintermediates Visa.

This wouldn’t be the first time the government has been able to grok payment market fundamentals when convenient to its own arguments. For example, in 1998, the Federal Reserve published a report concluding that the Fed should remain a provider of check processing and automated clearinghouse (ACH) services. At the time, the Fed itself, which competed with private ACH providers, handled 80 percent of commercial interbank ACH transactions. In the Fed’s view, however, its dominant market position was not a cause for concern because “with or without the Federal Reserve, the [ACH] industry is likely to be dominated by one or two large players, much like the market for credit card processing” (emphasis added).

The Fed had a point that ACH and payment card markets, with relatively high fixed costs and low marginal costs, will tend to have fewer, larger providers—but query why 80 percent market share should be no cause for concern when the Fed has it, but 60+ percent is alarming in the case of Visa?

Moreover, the government putting on its concerned face when it comes to alleged impediments to fintech alternatives takes a lot of chutzpah. The government itself is the undisputed titleholder in impeding fintech alternatives. In just the past few years, the federal government has sought to impose new compliance burdens on fintech providers without a risk-based justification, ramped up enforcement actions targeting fintech-bank relationships, denied state-chartered depository institutions lawful access to Federal Reserve master accounts, waged a relentless campaign of regulation by enforcement against crypto projects, and driven banks serving crypto clients into corners and out of business—to name just a few of its barriers to payment innovation.

One of the richest government hypocrisies can be seen in light of the DOJ’s concern that we’re missing out on fintech alternatives from big tech companies like Apple. Because when Facebook, now Meta, sought to participate in the development of a payment stablecoin (Libra, later Diem) accessible via a digital wallet linked to Facebook’s and WhatsApp’s user networks (among other wallets), the government lost its mind. Against that backdrop, the Biden Administration put forward a proposal to restrict stablecoin issuance to insured depository institutions (i.e., banks) and, thus, take it out of the hands of non-bank tech platforms.

If our government wants to identify obstacles to new payment tools, it should first look in the mirror.

Conclusion

The federal government is a massive bureaucracy with many, many departments—each with a different mandate and agenda. Yet the federal government’s overall resistance to payment alternatives has been such that when any federal agency claims to be defending fintech innovation, the appropriate rejoinder is “Yeah, if only.” Hauling leading private payment providers like Visa into court may garner headlines. But if the government is serious about payment alternatives it should first get to work removing all of the stumbling blocks—from regulation by enforcement to discretionary pressure campaigns—that Washington places in their way."