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Todd Zywicki
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Adam: On that Bankrate data, that's exactly the point--to try to capture the Durbin effects through time. Sullivan's study compares the Durbin effects to the non-Durbinized banks specifically and we present other data in the paper that shows that the availability of free checking has not declined at non-Durbinized banks. So if it oversamples large banks then that actually reduces any problems of non-representativeness of trying to capture Durbin effects. The use of that data is to try to capture the effects through time using a consistent data set. Elsewhere in the paper we discuss Sullivan and others contrasting Durbin with non-Durbin banks. The Moneyrates data shows a more than a doubling in fees from the pre to post-Durbin era ($5.85 to $12.23) then a slight decline (less than a dollar) then a jump again after the final rule was issued. I don't think that a decline of less than a dollar after an initial $6.50 jump--or to put it in annual terms, a decline of about $10 after a jump of about $75 in one period suggests that the initial jump wasn't significant (speaking, of course, in casual, not statistical significance terms). As for the CARD Act, it did not reduce rents; once combined with the effects of the Fed Regulations that preceded it, it is clear that it led to increased costs and reduced access to credit for higher-risk borrowers. I will be soon posting a paper that reviews all the evidence on that point, but they are all available. The only papers that have concluded that there was no price effect are those that fail to control for the Fed Regs that preceded the Credit CARD Act (some of them also don't consider output effects either, such as reduction in credit to higher-risk borrowers). Suffice to say, the bulk of the evidence does not support the hypothesis that the Credit CARD Act merely reduced rents as opposed to having an efficiency effect. As for the profitability point, again that is exactly the point--the big banks did lose business after they increased fees because of Durbin. Lower-income consumers became unbanked. Consumers in higher-income areas migrated to non-Durbin banks according to Sullivan. Durbin changed the economics of the industry for large banks--they used to be able to bank relatively small-dollar consumers who did not use additional banking services because debit card revenues were sufficient to cover their marginal cost. But post-Durbin they instead have dropped those now-unprofitable customers (and cut costs related to banking those customers, such as grocery store branches) and shifted their emphasis to those with higher balances or to whom they can sell more products. In other words, now that those customers are no longer profitable they can either pay the fees or walk, and the big banks don't really care if they walk now. So it isn't just about the revenues generated from the fees, it is about who doesn't pay the fees, namely, those who choose to drop their accounts and not pay the fees (and either shift to a less-preferred bank or become unbanked). So Durbin shifted up the supply curve for large banks, resulting in a lower equilibrium output and higher prices. How is that inconsistent with standard economics? If we impose a new environmental regulation on paper mills, the price of paper goes up, the output goes down, and we have a new equilibrium price and quantity. Does that demonstrate that the paper industry could've charged a higher price pre-regulation? Of course not. That's our point here--there was both a price and quantity effect, both in terms of shifting to unregulated banks (as Sullivan shows, which isn't surprising) or becoming unbanked.
Adam: As I understand it, you have two basic points. The first is that the Bankrate.com data is insufficiently comprehensive to be useful; the second is that the Moneyrates.com data on the increased monthly maintenance fees does not support our contention that the increase in bank fees is attributable to the Durbin Amendment. Let me respond to both. First, on the Bankrate.com data—I’m not sure what exactly the point you are trying to make here. You don’t seem to contest the claim that bank fees have been rising or that free checking has been retreating. You don’t offer any contrary evidence. So what exactly is the takeaway of your critique—that there is some reason to believe that the data are inaccurate? Why do we think it is useful? First, it is reasonably broad—250 institutions across 25 markets. Second, it is the most comprehensive data set we’ve been able to find in terms of the length of time it reports, using a consistent methodology. Third, during the period preceding the Dodd-Frank it shows a consistent upward trend in the availability of free checking, which comports with conventional understanding, and which suggests that the study is not biased. But more fundamentally, while the data set could be thicker, you provide no reason to believe that it is inaccurate. For example, do you think it is systematically biased for some reason? If so, does it overstate or understate the amount of free checking and the size of bank fees? And if it is systematically biased, is your position that it was also systematically biased pre-Durbin? The purpose for which we use it is to chart the trend, not the precise numbers—so unless you think the data is, and always has been, so flawed as to be useless, then your point seems to be simply rhetorical and grounded in any real empirical critique. If you have some reason to believe that it is systematically biased or so unrepresentative of a sample to be useless, then that would be useful information. If we were relying on it to make claims about precise points, that would be a useful critique. But we are using it for the limited purpose of drawing an apples-to-apples comparison over time, in which case I am afraid that nothing that you say is actually relevant to that. This can be contrasted, for example, with the terrible original Payday loan study that the CFPB did, which quite obviously is systematically biased toward overstating the number and length of payday loan renewals (as the CFPB itself subsequently implicitly admitted). Or the credit card complaint database, which makes no effort at even pretending like it is a representative sample. As to the Moneyrates.com data, the issue here is that you have to look at the underlying data (which we cite and which is freely available) to see what is happening. The Moneyrates.com data is collected on a biannual basis, but we presented it in the chart (Figure 4) on an annual basis for consistency with the other charts (and it didn’t occur to me that this might lead to misunderstanding the chart if someone didn’t look at the underlying data). Recall that Dodd-Frank, including Durbin, was enacted in July 2010—so almost perfectly at the midway point of the year. Moreover, the Durbin Amendment is a fairly clean test in that it was somewhat of a surprise to everyone; while there was some discussion of doing something on interchange, it was much more moderate (such as an exemption from antitrust laws). But the highly severe version of the Durbin Amendment came largely as a surprise. As a result, you wouldn’t expect to see much anticipatory movement prior to Durbin, but might see large adjustments after. So while, in general, you’d expect to see movement before the law was passed, in anticipation of the law, that might not be expected here (I’m assuming you weren’t actually arguing that there couldn’t be movement in variables in anticipation of a law being passed, just because the law happened to come later). If you go through the various Moneyrates.com reports here’s what you find: EOY 2009 $ 5.90 Mid-2010 $ 5.85 EOY 2010 $12.23 Mid-2011 $11.75 EOY 2011 $11.28 Mid-2012 $12.08 EOY 2012 $12.26 Mid-2013 $12.43 EOY 2013 $12.54 Note that it is precisely in the second half of 2010—the period immediately following the enactment of Dodd-Frank, that the fees shoot up, consistent with the hypothesis that it was a response to the Durbin Amendment. (Also note the smaller jump in the first half of 2012, the first full period after the Federal Reserve’s Regs became effective.) To be sure, some of the increase in bank fees could be a result of Dodd-Frank’s other regulatory provisions and the creation of CFPB; those factors, however, presumably would have been more anticipated and as a result, one might’ve seen an increase in fees prior to the final half of 2010 (although Dodd-Frank might’ve been more expensive than anticipated). Durbin, by contrast, was largely a surprise. I don’t think the big banks would’ve been so foolish as to wait until the actual Federal Reserve rules became final before they increased bank fees. Having said that, we are going to revise Figure 4 to make it clear that the jump in costs occurred in the second half of 2010 so that others who do not access the underlying data are not confused (it didn’t occur to us at the time to need to take that precaution). So if those are your two data critique, I don’t think either of these criticisms of the data are really very much on point (and the second is incorrect on the actual data). One larger point though on which I'm a bit confused--I thought that the informed position on this issue (as in Australia) was that the whole point of interchange fee price controls was to make payment card prices more "transparent" to bank customers by forcing them to pay more for cards. Shouldn't you be applauding the findings in the paper? Isn't this consistent with what Australia was trying to do and in fact claims to have done--increased the cost to consumers of using cards? When I was in Europe two weeks ago the folks in Brussels told me the same thing—that the point of this was to make costs for consumers “more transparent.” Are you disagreeing with that? If the costs don’t get transferred, then where do they go?
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Dec 3, 2013