Why the Fed needs to replace bark with bite
Antony Currie has a response today to those who say that the Fed’s U-turn on swipe fees “makes it look as if it can be cowed by the kind of intense lobbying the banks unleashed.” (Yes, that would be me.)
Antony reckons that the final figure of 21 cents “is actually a decent compromise,” and that “the Fed made the right call” — but it’s not entirely obvious why he thinks that. He says that the lower 12-cent figure was opposed by banks (duh) and “other senior banking authorities”; this is true, but it’s not in and of itself a reason to backpedal.
Banking regulators are interested in safety and soundness, and a multi-billion-dollar stream of risk-free income, in the form of debit and credit interchange fees, undoubtedly makes banks safer and sounder. But is that is not a good reason to gouge merchants every time someone makes a purchase using a debit card. And as Antony points out, banks somehow seem to survive elsewhere with much lower interchange fees: America’s are by far the highest in the world.
The farce that is “signature debit” is a big reason why, as Antony writes:
Though it rethought the fees, the Fed still missed an opportunity. U.S. debit fees are higher than elsewhere because Americans still sign for almost two-thirds of transactions — and banks keep pushing signature debit despite its being more susceptible to fraud. Browbeating banks to use PIN codes more would be safer and cheaper for all.
Behind this is the bizarre logic of US banks. First they encourage consumers to sign for debit purchases despite the fact that such purchases are much less secure; then they argue that they need high interchange fees because they have high fraud costs. This is financial chutzpah incarnate: the equivalent of the man who kills both his parents and then pleads for clemency on the grounds that he’s an orphan.
The Fed is well aware of how hollow this argument is. And it can persuade banks to move to PIN purchases in one of two ways: either by “browbeating,” as Antony would have it, or by simply making the finances of interchange uneconomical for signature debit. The second is what the Fed proposed in December, and it was powerful. The missed opportunity here was precisely to keep debit interchange at 12 cents. Now, the Fed can attempt the browbeating route, but it’s not clear what kind of browbeating Antony has in mind, and it’s even less clear that any such “moral suasion” would actually do any good.
Antony sees a pattern in the Fed’s behavior: start off extreme, and then compromise on something more reasonable.
The Fed made the right call. The trouble is it started with such an extreme stance. By digging in so early, it jeopardized the Fed’s important task of building a reputation as a regulator with a stiff resolve. Similarly, markets moved earlier this month when Fed governor Daniel Tarullo suggested banks should hold capital reserves of up to 14 percent — only to see international standards come in capped at around 10 percent.
Personally, I disagree that 12-cent interchange (which would be entirely unremarkable elsewhere in the world) is “extreme.” I also think that there’s a strong case to be made for forcing too-big-to-fail banks to hold so much capital that they have a real incentive to shrink.
But Antony is absolutely right about the pattern, and the message it sends: that the Fed is open to negotiation and compromise, and that as a result lobbying it aggressively and continuously is a no-brainer for the banks.
So let’s hope this is the end of the Fed going wobbly whenever Jamie Dimon starts having a temper tantrum. The Fed needs to show a lot more testicular fortitude going forwards, and, as Antony writes, “needs to be careful to be seen as a watchdog and not a lapdog”.
The problem is that the Fed has never been seen as a watchdog with teeth — Dimon is a director of the New York Fed, ferchrissakes. He’s literally governing his own regulator. And every time the Fed retreats from an initial position, it only looks weaker. Which is bad for the Fed, bad for America, and even, ultimately, bad for the banks being regulated. The Fed’s good at talking tough. Its job now is to actually be tough. Which is much harder.