Restrictions on Bank Revenue Streams Come From Fed This Week

Sources: Ft.com: Fed Bans Unauthorized Overdraft Charges; WSJ.com: Fed Slaps Curbs On Overdraft Fees; Reuters.com: Fed Bars ATM Card Overdraft Fees Absent Opt-in.

Thursday, November 12, The U.S. Federal Reserve announced the imposition of a new Fed policy that will ban overdraft fees on ATM and debit card transactions unless bank patrons “opt-in” to a consumer protection service. Under this policy, if an account lacked sufficient funds and the customer had not approved an overdraft plan, the withdrawal would simply be rejected rather than going through and resulting in large bank-imposed fines. The new rule does not apply to overdrawn checks or recurring debit card transactions such as online bill pay as Fed officials distinguished between “discretionary purchases” and payments consumers clearly want to go through, regardless of a fee. This policy comes at the heels of a decision made by banks earlier this year to self-impose limitations on overdraft fees for fear that government regulation would otherwise come. With Thursday’s announcement it becomes clear that the banks’ self-restriction nevertheless provoked further restriction from the Fed, and might be closely followed by the passage of new laws.

Financial analysts suggest that in these hard economic times, banks have become increasingly reliant on overdraft fees for extra revenue. Fed officials said that banks bring in between $25 and $38 billion in overdraft fines per year, and overdraft charges on a single purchase can be $30 or more. As a result of the new limitations, Bank of America is estimating a loss in revenue for the fourth quarter that falls somewhere in the range of $150-200 million. Economists say that in the wake of losses like this, banks will for new sources of revenue. Some banks have already made changes like raising interest rates on bank-issued credit cards, raising minimum checking account levels, and imposing annual fees for credit card use.

Bank regulators have been under pressure to impose new consumer protection regulations in the aftermath of the financial crisis, as reckless lending practices were a cause of the financial collapse. The fact that the Fed and other regulators failed to reign in those lending practices has brought about the suggestion that power of bank oversight and regulation be transferred to a Consumer Protection Agency. Among supporters of the demotion of the Fed are Senate Banking Committee Chairman Chris Dodd. In response to news about the Fed’s announcement, Dodd made a statement calling the Fed’s new policy “long overdue.” Dodd suggested that not only should consumers have the choice as to whether they want overdraft protection, but overdraft protection plans themselves should changed so as not to contain such things as excessive or double fees, processing manipulation and insufficient notification standards.

The Fed’s new regulation goes into effect July 1, 2010.

Discussion Questions:

1) Dodd called the Fed’s regulation of banks before and during the financial crisis an “abysmal failure.” Is the Fed’s lack of regulation leading up to the financial crisis a symptom of the Bush Administration’s policy on federal oversight or a fault of the Fed itself?

2) What are the benefits of having a Consumer Protection Agency in control of bank regulation rather than the Federal Reserve? Can you envision the role of the Fed after its regulatory power had been stripped?

3) Is the interest in having overdraft protection outweighed by the potential for high fees? Do you agree that there is a distinction between “discretionary purchases” and other purchases? Should customers be required to opt-in to all overdraft protections?