Bailout

Why bank fees need to be regulated

By Felix Salmon

Whenever I write a blog entry advocating more and/or better regulation, the laissez-faire types, like Vincent Fernando, have a tendency to come out of the woodwork:

I believe we need to keep holding people responsible for their decisions and personal management…

While overdraft fees are quite high, at the same time they are usually easy to see once they hit you. I’ve been hit by them in the past, I got burned, and I became double vigilant not to get burned again. If someone is hard up for cash, there are better ways to get short term loans, actually a credit card, though expensive, is probably cheaper than overdraft using the numbers Mr. Salmon mentioned. I doubt the majority of people who pay frequent overdraft fees don’t have an alternative method to manage their cash, or aren’t able to see these fees by checking their statements. If they managed a budget they would notice some money missing. As seen with credit cards, some people just need to manage themselves better…

Note that the normative modal verbs here: I wrote that the banks “should be stopped”. In response, Fernando says that “we need to keep holding people responsible” and that “some people just need to manage themselves better”. But here’s the difference: stopping banks is, conceptually, possible. But the $38 billion in annual overdraft fees are clear proof that Fernando’s “people” just aren’t going to magically start managing their finances in an optimal manner.

Empirically speaking, it’s clear that the 20% of checking account holders who pay, on average, $1,374 in annual overdraft fees apiece are precisely the people least able to afford them. They’re probably also the 20% of people who, for whatever reason, find it very difficult to manage their personal finances. Not everybody is as numerate and sophisticated as Vincent Fernando — a lot of people can’t even manage simple addition and subtraction. Is it fair for the highly-sophisticated and numerate executives at international banking giants like Bank of America to take advantage of that financial illiteracy in order to line their own pockets with multi-million-dollar paychecks? Or should people be able to trust their banks implicitly?

The fact is that we don’t live in a world or a country where everybody with a checking account has the ability to critically check their statement and see what’s going on. In many cases, including the one detailed today by Karen Blumenthal, that’s because the bank clients concerned are elderly or otherwise vulnerable. Truth be told, I don’t spend all that much time checking my bank statement myself, and I certainly don’t “balance my checkbook” — the rather anachronistic term of art for keeping an independent record of your income and expenditure and therefore how much money you’re supposed to have in the bank.

It seems to me that we’ve tried Fernando’s solution — trying to exhort people to work this stuff out on their own, and to keep one step ahead of the predatory banks — and it has clearly failed. So now we go to Plan B, which is regulate the banks directly. Since they’re clearly incapable of keeping their fees under any kind of control.

Full post as published by Macroprudential on July 02, 2009 (boomark / email).