Epstein Discusses Banking Fees on NY Times Room for Debate

Consumers Pay for Excess Regulation
Richard A. Epstein
The New York Times
April 29, 2012

The central question for banking is how to implement a sustainable business model that covers both its fixed and variable costs. Banks get no fees from setting up branches or incurring background administrative costs, including the heavy costs of regulatory compliance. These expenses must be recovered from operating revenue.Banks cannot charge only for the cost of the specific service. Unless they can somehow cover the costs of setting up the system, they cannot hope to remain in business.

The failure to understand this basic point has led to a massive contraction in bank fees from credit cards under Carolyn Mahoney’s ill-conceived credit CARD act, and from debit cards because of Senator Dick Durbin’s amendment to the Dodd-Frank law that slashes the fees banks charge cardholders by about 50 percent.

Denied these key revenue sources banks have had to change their business models. After credit card regulation, banks are rightly more selective in the customers whom they will serve. After debit card regulation, they have had to pull the plug on their rewards programs. Slashing benefits does not do the entire job, so banks have had look elsewhere to obtain recover the revenue needed to meet their fixed costs, in order to meet the bank capitalization requirements imposed on them from without. The predictable consequences of this regulation are increased charges for checking accounts (which now are integrated seamlessly with credit and debit card entries).

Faculty: 
Richard A. Epstein