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OpenMarket: Banking and Finance

  • New Study Estimates around $70 billion in Financial Regulatory Costs

    July 31, 2014 7:00 PM

    Complying with regulations is part of the cost of doing business. For bigger businesses that can absorb those costs (or rather, pass them on to the consumer), it means armies of compliance officers and hefty fees. But for smaller businesses, like community banks, the costs can be so great that it means ceasing operation.


    Typically, this scenario works to the larger institutions’ advantage, as they are better placed to handle regulatory compliance costs than are their smaller competitors. But large financial institutions are also subject to certain regulations to which smaller banks are not. The Wall Street Journal cites a new study that estimates the cost to these larger banks of complying with these regulations at roughly $70 billion.


    Some of these costs are fair, such as, for example, premiums charged by the Federal Deposit Insurance Corp for insuring deposits. Others seem less fair, such as the $2.06 billion lost to interchange fee restrictions—which incidentally, have led to more and more banks to stop offering free checking in order to compensate for this loss of income. 


  • Bitcoin’s Undiscovered Potential

    July 28, 2014 9:58 AM

    A recent piece in American Banker magazine explores how Bitcoin and other cryptocurrencies can help the underprivileged, particularly the millions of unbanked people who do not have bank accounts. This is an area where digital currency could do much good.


    In fact, the online microfinancing platform Kiva has already begun a peer-to-peer service, known as Kiva Zip, whose model resembles some of the features in Bitcoin. Microfinancing is a form of lending for lower-income people that provides smaller loans than commercial banks are typically able to offer. Kiva Zip’s peer-to-peer structure means that users interact directly with each other, without administrators or other institutions acting as a middleman.


    Another service known as Swarm is already proposed to implement crowdfunding based on the Bitcoin protocol. Crowdfunding is a service where persons or companies propose a project or service they wish to develop and create a campaign to solicit funds for development. It is typical for campaigners to offer prize incentives for larger contributions, such as earlier access to the product or other perks.


    These new innovations represent just the initial adaptations of the Bitcoin protocol. In order for these technologies and services to continue to develop—and to help people—it is imperative that new regulations not be prematurely implemented. Otherwise, it will not be just Bitcoin businesses that suffer. Those at the bottom of the economic ladder could suffer as well, as they would lose precious opportunities to access capital.


  • Subprime Auto Concerns Caused by Government Intervention

    July 25, 2014 1:19 PM

    Should we worry about a crisis in subprime auto loans? That question has been asked in the financial media lately.


    My answer is yes, with caveats. While there are important differences in the auto and mortgage markets, there are similar government interventions that have the potential to fuel a bubble in car loans the same way they did for home loans.


    First, the differences. So far, thankfully, there is no auto equivalent of a Fannie Mae, Freddie Mac, or other government-sponsored enterprise to inflate the car loan market. Sure, there have been lots of bailouts in the auto industry in general, but the secondary market in car loans has developed largely on its own.


    And without a government backstop, it is much smaller than the mortgage market ever was. An otherwise alarmist front-page story this week by The New York Times conceded, “the size of the subprime auto loan market is a tiny fraction of what the subprime mortgage market was at its peak, and its implosion would not have the same far-reaching consequences.”


    Also, unlike with mortgages, there is no expectation among the vast majority of lenders of borrowers that a car’s value will appreciate. Most folks know that a car will be “underwater” the minute it is driven off the lot, and the loans are priced with that reality in mind.


    Yet, there are some striking similarities. But not the ones the NYT or other nannyists point to.


  • Cronyism and the Export-Import Bank

    July 8, 2014 10:02 AM

    Over at Rare, I have a piece on the cronyism angle of the Export-Import Bank debate. The Senate will likely vote this on month on whether or not to end the bank:


    [I]f government is going to dole out corporate welfare, the most efficient way to do it is to hand out cold, hard cash. Straight subsidies don’t distort international markets or invite corruption the way export subsidies do.


    But most cash gifts to corporations are political non-starters. They’re a little too obvious. So companies and allied politicians need cover stories. The Export-Import Bank fits the bill.


    An official logo, sophisticated-sounding economic rhetoric, and appeals to American jobs and patriotism are designed to make people feel good about the special favors Ex-Im performs for businesses.


    Read the whole thing here.


  • Dodd-Frank Is Obamacare for Non-Health Insurance

    July 7, 2014 1:48 PM

    “If you like your life, home, and auto insurance, you can keep them.”


    President Obama didn’t make this promise when he signed into law the Dodd-Frank financial overhaul on July 21, 2010, as he did regarding the health insurance law – Obamacare – that he signed into law a few months earlier that year. But as syndicated columnist Jay Ambrose points out, “if the Dodd-Frank regulatory law does what is now plotted, though he will still share responsibility for the insurance provision that, along with others, could bloody lots of noses.”


    As Dodd-Frank approaches its fourth anniversary, Obama is singing its praises. He told National Public Radio on July 2 that Dodd-Frank is “an unfinished piece of business, but that doesn't detract from the important stabilization functions” it has provided


    Yet even to lawmakers from Obama’s own party, this “financial reform” legislation is looking more and more like a destabilizing force – much like the so-called “reform” of health insurance. Even at the outset, there were many similarities. Both Obamacare and Dodd-Frank contained about 2,500 pages that were rammed through a Democrat-controlled House and Senate at breakneck speed. Because of the length of the law and speed of passage, many did not understand and/or hadn’t read the bills.


    Also as with Obamacare, unintended consequences of Dodd-Frank almost immediately began to surface. First, there was a sharp reduction in free checking due to the price controls on debit card transactions from the Durbin Amendment. Then, community banks and credit unions – including some with close to zero foreclosures – found the “qualified mortgage” rules so costly and complex that they slowed down or stopped altogether the issuance of new mortgages. Then, with regard to a provision with no plausible connection to sound banking and finance, domestic manufacturers found themselves having to trace back numerous materials they utilize to determine if they had originated as “conflict minerals” from the Congo.


    But the latest unintended consequence may be the one that bears the most striking similarity to Obamacare. Just as health insurance premiums and deductibles skyrocketed due to Obamacare’s many mandates, so too may those of life, home and car insurance due to provisions of Dodd-Frank. Life insurance rates alone could soar by $5 billion to $8 billion a year, according to the respected economic consulting firm Oliver Wyman. And as with Obamacare, choices of policies will be more limited and some policies may even be canceled.


  • Obama Drives Up Tuition at Taxpayer Expense by Expanding Pay As You Earn Program

    July 2, 2014 4:11 PM

    If you wanted to encourage wastefully run colleges to ratchet up their tuition at taxpayer expense, you couldn’t come up with a better way than the Obama administration’s recent expansion of the Pay As You Earn program. That program limits borrowers' monthly debt payments to 10 percent of their discretionary income. The balance of their loans is then forgiven after 20 years—or just 10 years, if the borrower works for the government or a nonprofit.


    It will cost taxpayers a bundle, while doing nothing for most student borrowers (who may experience tuition increases as a result), and it will favor imprudent borrowers over prudent borrowers. 


    Most students chose inexpensive colleges or otherwise borrowed modestly, meaning “the average graduate’s debt level of $27,000” is no more than “the price of a car.” They will not choose to participate in this program, since they would pay more, rather than less, by paying ten percent of their income for years, which could add up to much more than $27,000 over a 20-year period.


    But imprudent borrowers who borrowed much more than that, for a major that does not lead to a high-paying job, will now be able to limit their payments to a fixed percentage of their discretionary income, and then have the unpaid balance remaining after 20 years (or just 10 years, if they go to work in the federal bureaucracy) written off at taxpayer expense, no matter how huge the unpaid balance is.


  • Finance for the People

    June 19, 2014 9:49 AM

    Over at The Freeman, I take a look at how technology has been democratizing access to capital, bringing news ways of raising money to people who need it but don’t have it. I outline some of the many tools people now have for accepting, raising, or borrowing funds.


  • Ex-Im Reauthorization Fight: Release the Reagan

    June 19, 2014 9:46 AM

    The Export-Import Bank is up for reauthorization in September. If the vote fails in Congress, the Bank and its $140 billion portfolio will cease to exist. In an effort to appeal to free-market types who oppose Ex-Im, the Aerospace Industries Association is invoking Ronald Reagan. A page two ad in today’s Politico and an accompanying fact sheet sent to every member’s office on Capitol Hill prominently feature Reagan’s image and include quotes of the Gipper praising Ex-Im.


    The fact sheet even notes that Reagan increased the cap on Ex-Im’s lending portfolio by 14 percent from 1981-86, from $8.8 billion to $12 billion. Then again—Reagan cut Ex-Im in 1983 and again in 1988. And over Reagan’s entire time in office, Ex-Im’s cap actually shrank in real terms. You can check the numbers yourself with the Minneapolis Fed’s handy inflation calculator.


    And as Veronique de Rugy ably points out here and here, Reagan was no fan of the Export-Import Bank, and said so publicly (see also video evidence).


  • Questions for Richard Cordray

    June 18, 2014 8:39 AM

    This morning, Richard Cordray, head of the Consumer Financial Protection Board, testifies to a House Committee on the Board's semi-annual report. One of the Board's prime focuses has been the payday lending industry, which it was empowered to regulate by the Dodd-Frank Act of 2010 (and CEI has concerns about the way it is going about that).


    However, the industry is under a quite separate assault from the Department of Justice and other banking regulators, who are aggressively investigating the banks that provide its financial oxygen in an initiative known as Operation Choke Point. While the CFPB was involved at a very early stage, according to internal DOJ memos, it appears to have dropped out. Cordray should face some questions on this. Here are a few he perhaps should be asked:


    Q1: “You have said that you are aware of Operation Choke Point that the Department of Justice is coordinating ostensibly to investigate fraud among banks and payday lenders. Do you believe it is possible that such a broad sweep investigation as Choke Point might deter banks from doing business with legitimate payday lenders?”


    If Cordray answers in the negative, he should be shown the complaint recently filed in federal court by payday lenders. There is plenty of evidence this is happening.


  • Cantor’s Loss a Warning Shot to Supporters of Ex-Im Bank and Johnson-Crapo

    June 16, 2014 4:31 PM

    Defying conventional wisdom as he often does, Pulitzer prize-winning pundit George F. Will disputed the notion that in the wake of the shocking primary loss of House Majority Leader Eric Cantor (R-Va.), even less in Congress will get done.


    “I’ll tell you something that may get done now because of this and that is deauthorizing – refusing to reauthorize -- the Export-Import Bank.” Will said on “Fox News Sunday” (hat tip to National Review for providing the clip.)


    Will went on to state his view that “the Export-Import bank played as large a role in that election as immigration did.” Michael Barone also lists Cantor’s support of reauthorizing the Export-Import Bank as a reason for the stunning loss.  


    While political prognostication is admittedly not OpenMarket’s expertise, the Export-Import Bank – a government backstop for foreign businesses buying goods from large U.S. corporations -- does seem to fit the “cronyism” charges of Cantor’s victorious opponent Dave Brat.  And though not an issue in the Brat-Cantor race, the Senate Banking Committee’s GSE “reform” legislation known as Johnson-Crapo would fit that bill as well.


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