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OpenMarket: Financial Regulation

  • The Economist: Interchange Fee Caps Benefit Large Retailers at Consumer Expense

    October 9, 2014 11:52 AM

    Surprise! Price controls lead to unintended consequences—including transfers of wealth to parties who lobbied for those controls.

    That’s the actual – and unsurprising – result of the an amendment to the 2010 Dodd-Frank financial reform bill, sponsored by Sen. Richard Durbin (D-Ill.) that caps fees charged by banks for payment cards, mainly debit and credit cards. As The Economist reports:

    [T]he limits on “interchange fees”, as the financial jargon has it, have not worked out as planned. They have resulted, by one calculation, in the transfer of between $1 billion and $3 billion annually from poor households to big retailers and their shareholders. These were not the beneficiaries Mr Durbin had in mind when the amendment came into effect three years ago this week.

    Or are they? This result is exactly what I said would happen. And as I noted at the time, Sen. Durbin was quite open about whose interests he had in mind.

  • See Me at San Francisco Crowdfund Banking and Lending Summit

    October 8, 2014 2:05 PM

    My colleague Wayne Crews’ Forbes column Monday explained “How Entrepreneurs Can Speak Out About the Cost of Regulation,” but noted sadly that “businesses that never form in the first place because of regulation never get a chance to talk.”

    But there may be at least one exception. Next week in San Francisco, a conference will bring together entrepreneurs and investors to discuss, in part, businesses that can’t form because of the thicket of red tape.

    Coastal Shows, producer of the annual Crowdfund Global Expo (CFGE), will host the CFGE Crowdfund Banking and Lending Summit at San Francisco’s Grand Hyatt on October 16 and 17. A bevy of prominent speakers, including yours truly, will talk about crowdfunding as a new frontier that could open up opportunities in investing and lending, if only some of the antiquated securities regulations could be trimmed.

    When most folks hear the word “crowdfunding,” they think of sites like Kickstarter and IndieGogo in which fans can fund a new project and get souvenirs such as T-shirts. These innovations should be applauded, but they only scratch the surface of what crowdfunding could do. Viewed broadly, crowdfunding could bring together investor and entrepreneurs, allowing them to bypass “middle men” such as Wall Street banks.

    But as I wrote recently in Forbes, if one of these crowdfunding projects currently were to offer funders a piece of the potential profits—instead of  T-Shirts and other trinkets—it would run “into a brick wall from 1930s-era Securities and Exchange Commission (SEC) rules that treat a promise of a share of a business’s earnings a ‘securities offering.’”

    As I explained, “this would subject entrepreneurs making a simple pitch for funding movies or music to the panoply of federal securities laws—including the behemoth Sarbanes-Oxley and Dodd-Frank laws—that publicly traded corporations must contend with every day at a cost of millions of dollars per year.”

  • Nationalizing Bitcoin?

    September 9, 2014 10:13 AM

    The phrase “if you can’t beat them, join them” seems so applicable in light of the Commonwealth of Dominica announcing plans to distribute bitcoins to all of its citizens. This is a wonderful attempt to integrate people into a burgeoning market. The timing could not have been better, as Ecuador also announced it will introduce its own cryptocurrency. The key difference between Ecuador and Dominica’s plan is that Ecuador plans to implement its currency through its central bank, whereas Dominica plans to disperse bitcoins directly to its citizens. Perhaps fearing competition, Ecuador is also banning Bitcoin, so the central bank’s cryptocurrency will be the only game in town. It’s a fascinating natural experiment in the making.

    Forbidding competition is a mistake on Ecuador’s part because competition is what truly allows the best goods and services to develop, so it looks like Dominica’s experiment will be more successful for it citizens.

    Moreover, Bitcoin was created to resist centralized institutions, according to the original white paper by Satoshi Nakamoto, the currency’s creator. These cryptocurrencies represent the potential for non-fiat currency to be used on a global scale. This potential should be nurtured, not squandered by governments.

  • You’re a SIFI, Charlie Brown

    September 5, 2014 7:37 AM

    “Good grief!”

    That’s what the Charlie Brown, star of comic strip Peanuts and cartoon spokesman for the MetLife insurance firm, might say about the government’s actions against MetLife yesterday.

    The Financial Stability Oversight Council (FSOC), an unaccountable, secretive task force of financial bureaucrats created by the Dodd-Frank “financial reform” bill that was rammed through a Democrat-controlled Congress in 2010. Yesterday, FSOC designated MetLife as a “systemically important financial institution” or SIFI. This means that the federal government officially considers MetLife to be “too big to fail” and subject to the same Dodd-Frank bailout regime set up for banks.

    Many firms would see being tagged as a too-big-to-fail SIFI as a blessing. As CEI argues in our constitutional challenge to the FSOC, part of our comprehensive lawsuit against Dodd-Frank, the SIFI designation confers on a firm a strong competitive advantage, as investors know the government won’t let it fail. That’s why big banks and MetLife competitor AIG, who have already received billions in taxpayer bailouts, have eagerly embraced their SIFI status.

    But MetLife, to its great credit, has public stated it’s not too big to fail and does not want the special privileges that come with the SIFI status. MetLife’s Chairman and CEO Steven A. Kandarian declared publicly last year, “I do not believe that MetLife is a systemically important financial institution.”

    Unlike AIG and the big banks, MetLife has never taken a dime in taxpayer bailouts. And all it is asking for now is not a handout, but for the federal government to keep its hands off of the successful business model MetLife has utilized for decades to provide insurance to many satisfied customers.

  • The Impending BitLicense and Premature Regulations

    August 19, 2014 3:19 PM

    Last month, the New York State Department of Financial Services (NYDFS) announced its proposed regulations for businesses engaged in “Virtual Currency Business Activity.”The Department defines these businesses as being involved in the following types of activities, according to provision 200.2n:

    “(1) receiving Virtual Currency for transmission or transmitting the same;

    (2) securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;

    (3) buying and selling Virtual Currency as a customer business;

    (4) performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or

    (5) controlling, administering, or issuing a Virtual Currency.”

    It is worth noting at the start that provision 200.3c2 would exempt “merchants and consumers that utilize Virtual Currency solely for the purchase or sale of goods or services,” from needing to obtain a license and thus being subject to these regulations. This is helpful, as otherwise these regulations would probably have prevented any widespread adoption of virtual currency by merchants. However, there are certain other non-consumer functions of virtual currencies that are not covered by this provision, such as charitable donation. It should therefore be broadened.

    The proposals were received with much skepticism and dismay among the virtual currency community, particularly after NYDFS head Benjamin Lawsky had said in January, “Our objective is to provide appropriate guardrails to protect consumers and root out money laundering -- without stifling beneficial innovation.” Unfortunately, the proposed regulations have provisions that will almost certainly stifle beneficial innovation while not doing much to protect consumers. Four provisions in particular stand out as problematic.

  • 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.

  • 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.

  • 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.

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