Feedback: Banks Can't Plan Ahead for Regulatory Overkill

"Re: Stop Shrieking about Durbin and CFPB, Start Planning Instead," May 31

There is and has been for decades a general view that no matter how much you beat up on banks they will just figure it out and keep on keeping on. Of course, that advice has never been true for the whole industry. As regulatory burdens have continued to accumulate over the decades (we are still waiting for any genuine regulatory relief, net-net), the banking industry has continued to shrink. The number of banks has declined dramatically, and the share of the financial services industry market held by banks has declined. The number of banks is half what it was 20 years ago and still falling, and banks, that used to provide well over half the loans in the U.S., have about a quarter of that market today.

So, perhaps it should not be astonishing that the attitude of banks toward the kind of advice in this article is, "Wouldn't it be nice if we could just get on with business?" But, there are few banks today that are able to form a business plan for more than 12 months ahead, because we don't know what kind of business the coming regulations will let us be in. It is very easy to say, and very hard to do, to tell banks to forget about key sources of non-interest income like interchange and overdraft services. How will banks make up for that lost income. How would anyone make up for losing a third or more of his income? Cut expenses for find other ways to make money. Banks are trying to do that, but to find a way to do that and still serve customers well, and serve changing regulatory interests, too — that is a tall order.

Very nice advice in the article: banks, just offer more credit cards instead of debit cards, but how do banks forget that debit cards are not credit instruments and that credit cards are subject to very different and increasingly demanding credit underwriting standards not involved in mere debit products? And also don't forget that debit cards are a source of income for virtually every bank, large and small, while the credit card business, with its narrow spreads, high loan loss and marketing costs, relies upon economies of scale and is therefore dominated by larger banks. Very nice to forget those realities unless you have to live in them. Equally valuable is the advice to banks to denigrate the value and flexibility of overdraft programs to customers — and convert those debit products into loan products with credit underwriting standards, too. Again, much harder for community banks to do, but harmful overall to customers — remember, under Federal Reserve rules, as of the

end of last summer all customers of overdraft services voluntarily opted in for them. They want the services that some regulators have in mind denying them. And many customers who benefit from overdraft programs would not qualify for credit products. Cutting them off from services that they have chosen and that banks manage safely is not very consumer friendly.

We have heard all this kind of advice before. The banking industry is recognizing that this is the kind of advice that really leads to nowhere. Unless you want a banking industry run by the folks who are happy running the Post Office and water authorities. That kind of banking system won't serve family and business customers very well.