Biden's regulatory agenda threatens the health of American banks

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This week, President Biden will deliver his State of the Union address, in which he is expected to tout his administration's financial regulatory agenda that mischaracterizes and threatens to harm our American banking system — the strongest, safest and most competitive in the world.

For generations, banks have driven the U.S. economy forward, and helped millions of Americans achieve their dreams of paying for college, buying their first home and starting their small business. Comprised of nearly 5,000 institutions that vary in size, scale and offerings, the U.S. banking system is truly an embodiment of capitalism and the free enterprise virtues we hold dear. And America's leading retail banks have millions of team members who live and engage in the communities across the U.S. that they serve. 

Following the Great Recession, regulators spent more than a decade instituting vast reforms that have ensured our nation's banking system is among the most well regulated in the world, with banks already spending billions annually to comply with myriad rules intended to protect consumers and bolster the resiliency of the system, including significant annual stress tests and many other requirements to ensure banks remain well positioned to weather even the most severe economic scenarios.

While banks agree with the need for appropriate levels of regulation and capital requirements, too much of either weakens the very fundamentals that separate our system from any other in the world. That's why it is deeply concerning to take stock of the current regulatory agenda from the Biden administration, which over the past year has introduced hundreds of proposals from multiple agencies that would impact nearly every line of business at banks today. Each of these, on their own, would have significant impacts on banks' ability to lend and could reduce Americans' access to credit and increase costs for families and small businesses. Collectively, these proposals would also likely force some banks out of the market, push lending to less regulated venues, weaken America's competitiveness and slow our economy. 

Consider, for example, the many active proposals to change how credit cards work. Notably, the Consumer Financial Protection Bureau finalized a rule that will arbitrarily and dramatically lower credit card late fees. But the CFPB has openly conceded that under the rule, the majority of cardholders — almost 75% — will likely see their credit card interest rates increase. Many borrowers will also see their credit availability decrease. These outcomes will be particularly impactful for the nearly 50% of subprime card consumers who work hard and budget to successfully pay their bills on time — and will now have a more difficult time obtaining credit, managing their debt and improving their financial well-being.

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By Kate Berry

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Meanwhile, the Federal Reserve has unveiled a new proposed rule to lower debit card interchange fees. If enacted in its current form, banks would be forced to offset lost revenue currently used to provide consumers access to free checking accounts. This is not theoretical, as multiple past studies from the Federal Reserve Board have found none of the supposed debit card interchange "savings" has gone to consumers, and instead is kept by retailers. In fact, the Federal Reserve Board's research shows debit card interchange price regulation led to a contraction of free and low-cost checking account products, higher balance requirements for consumers to avoid fees and an increase in other service fees. Further academic research released last year found these effects would be felt most significantly by lower-income and low-credit-score households, with consumers paying up to $2 billion more if this proposal were finalized. This rule — coupled with the recent Basel III endgame proposal to require banks hold 20% more capital — will only further constrain banks' ability to lend to consumers.

We've seen this with a recent one-size-fits-all proposal to revamp banks' already highly tailored overdraft products, as well as a proposal to ban nonsufficient funds fees, which the CFPB recognizes that the vast majority of America's leading banks do not currently charge. The overdraft proposal is especially problematic as it would result in banks not being able to provide this essential short-term liquidity tool to consumers, which many have come to value. A recent survey even shows that the vast majority of consumers who use overdraft would rather pay a fee than have their transaction declined.

However well-intentioned, regulation comes at a cost. Now is the time for policymakers in Washington to step back and analyze the true cumulative impact and costs of these regulations — to the banks, their consumers and small businesses and to the competitiveness of the American financial system — and ensure regulations are guided by sound policy, not partisan politics. Doing so will help to prevent a deep and unmendable crack that could form in the foundation of our financial system, to the detriment of consumers and small businesses alike.