Wonks Present 'R&D' for Consumer Credit at Philly Fed Forum

PHILADELPHIA — The presentations were academic to say the least, complete with formulas, equations, Greek letters, footnotes, and oddly sterile language. One economist referred to consumers facing foreclosure and bankruptcy as "agents."

But interest in the Sept. 23 conference, which focused on credit problems facing consumers after the financial crisis, went far beyond the ivory tower — which was exactly what the organizer had hoped for.

"We're improving the dialogue between the industry and regulators and academic researchers," Robert Hunt, director of the Payment Cards Center at the Federal Reserve Bank of Philadelphia, said in an interview.

"We've just gone through a period of crisis. Now is the time to do much more R&D, so we're prepared for the future," he said. "We are trying to learn as much about this crisis as we can, so that by 2014 or 2015 we have in place a much stronger central bank and surveillance, and the industry itself has strengthened its internal risk controls."

It was the Philadelphia Fed's sixth time hosting the biannual conference, which Hunt said started off as a meeting of "all Ph.Ds" in 2001. This year the audience included employees of JPMorgan Chase & Co., Citigroup Inc., Visa Inc. and other large banks and financial companies; representatives from the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corp., and Federal Reserve Banks around the nation; and several credit counselors and employees of nonprofit foundations.

The official speakers were still all Ph.Ds. They were largely reluctant to state firm conclusions in the working papers they presented, but several of the ideas they raised were intriguing — and could potentially affect U.S. banking regulations in the future.

Stockholm University economist Marieke Bos, for example, is studying the effects of Swedish policies that require credit bureaus to erase negative data about a consumer's debt history after three years. (In the United States, by contrast, the credit bureaus keep records of consumers' delinquent payments, charge-offs or bankruptcies on file for at least seven years.)

While Bos is still revising her paper, she presented evidence suggesting that consumers could regain access to credit more quickly, without significantly increasing their risk of redefaulting, if their credit files were scrubbed after a relatively short period of time.

The U.S. government's recent caps on debit interchange fees were another hot topic at the conference, and the audience was especially lively after a presentation on the "adoption and use of payment instruments by U.S. consumers." The paper, presented by Boston Fed economist Scott Schuh, is still a work in progress but is examining some possible long-term consequences of the Fed's new debit interchange restrictions.

Those restrictions take effect on Oct. 1, and many banks have already started trying to recoup the revenue they expect to lose as a result. Most large banks have already discontinued rewards programs or added fees to checking accounts and debit cards that once were free.

As the cost of using debit goes up, many consumers may switch back to paying with cash and checks instead of with debit cards, Schuh said during his presentation.

But some banks may try to offset the regulations by increasing the fees for all of their services, instead of just their checking and debit accounts, Schuh added. If that happens, "the biggest response by consumers is to shift towards credit cards," he said.