The NYT had a piece reporting on how banks may alter their business practices in order to make up for provisions in the financial reform bill that could reduce profits. The article notes that banks may start charging for some services that they currently provide free to customers. For example it reports that banks may no longer offer free checking, instead charging most customers fees for their accounts as a way to make up for lower margins on credit and debit cards.

The piece then quotes J.P. Morgan CEO Jamie Dimon:

“If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger. ... Over time, it will all be repriced into the business.”

Actually, this is not typically true. If a particular restaurant charged high prices for its drinks in order to subsidize its burgers, then we would expect many customers would just buy the burgers and order water. The restaurant would only be able to get away with its burger subsidy strategy if it either did not offer the customer the choice of just getting the burger or if there was collusion with other restaurants. This suggests collusion in the highly concentrated credit and debit card industry, which would mean that anti-trust action would have been appropriate in the absence of the restrictions in the new law. The implication is that banks used their market power to have customers subject to overdraft fees or users of debit cards subsidize the checking accounts of customers who did not paid these fees.

It also is worth noting that banks' profitability will not necessarily be restored to pre-regulation levels. This would only necessarily be the case if banks were just making a normal profit, below which they would go out of business. Certainly J.P. Morgan and other large banks are making more than a normal profit.

 

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