Fewer Americans have access to traditional banking services such as checking accounts, consumer loans and credit cards than they did five years ago. Part of this has to do with the housing bust severely damaging the finances of U.S. households. But millions more have lost access to credit or essential banking services due to regulatory reforms imposed over the past four years.
If you looked back in 2005, the number of “unbanked” Americans was closer to one in four. At the current rate, that number will reach one in three in 2013.
Excluding millions of Americans from traditional banking services is not an efficient means of commerce and will result in long-term negative consequences for our economy. The negatives include higher transaction costs, lower household savings, and the concentration of credit in the hands of the few—conditions more commonly associated with Third World countries.
Banks are partly to blame for the post credit-crisis shrinkage in banking services. They have not figured out a way to reprice consumer loans effectively in a post-securitization world. For decades, banks could underprice consumer loans (mortgage, home-equity and other personal loans) because they were subsidized with the high fees from securitizations. That all ended with the collapse of the subprime mortgage market.
Still, four years after the death of securitization, many banks are still pricing second mortgages cheaper than first mortgages (one is priced off the London Interbank Offer Rate and the other off of the 10-year Treasury bond yield). Instead of changing this archaic pricing structure, the banks have simply pulled back from this once heavily relied upon financing product. Note, more than 75% of American mortgages are not underwater and could be eligible for this product. This is just one example of a host of consumer-lending products.
But importantly, banks are not to blame for the unintended consequences of ill-planned and ill-timed regulatory reform. The Credit Card Accountability, Responsibility, and Disclosure Act (CARD) essentially restricted a bank’s ability to quickly reprice credit-card interest rates. It was passed in 2009 after the peak of the credit crisis, with most of the provisions going into effect in February 2010.
Since mid-2008, over $1.6 trillion in credit lines have been expunged from the system. Under the new law, banks could no longer use other credit bureau information to reprice, as decisions had to be based upon the credit experience of the issuer alone. These restrictions made it far more difficult to effectively price for the evolving risk of a consumer.
Overdraft protection (“Reg E”) reform has had a similar impact on retail bank customers. By limiting the fees banks can charge customers, regulators have in effect made the expense of servicing some customers greater than the revenue they generate. In many cases, regulations have made the overall economics of branch banking uneconomic. Consequently, many bank branches have shuttered, nearly 1,500 since 2009.
Pre-paid debit cards have grown exponentially over the past few years. (Pre-paid cards are vehicles that essentially allow a consumer to borrow from themselves.) Many of these come with high fees. They are not the solution, but merely the only viable option in the current regulatory environment. Will they be the next target for well-intentioned regulatory reform?
There are examples of individual banks getting this right. One example is PNC, which recognized early into the crisis the need to create a “halfway house” of sorts to rehabilitate customers under newfound distress. Programs like PNC’s Foundation Checking account allow customers with tarnished credit histories to maintain an account with no minimum balance after completing a workshop on managing it. Unfortunately, this example is more the exception than the rule.
As an industry, banks need to get in front of this debacle and establish a sensible pricing matrix for the new post-securitization world of financial products and consumer banking. Meanwhile, regulators should seriously reconsider the restrictive provisions in the CARD Act and Reg E, and lawmakers should subject to heightened scrutiny anything forthcoming from the newly established Consumer Finance Protection Bureau.