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Banking Reform and You: What Will It Cost? (Part 2 of 3)

July 20, 2010

| MoneyRates.com Senior Financial Analyst, CFA

How will the long-awaited financial reforms passed by Congress in July 2010 affect banking and deposit rates? MoneyRates.com brings you a three-part series on the likely effects of this law. Part 1 looks at whether the financial system has been made safer for depositors, and Part 3 discusses how the financial reform legislation should affect shopping for a bank.

In this second installment, we look at the costs of implementing the new financial reforms: both to banks and to its deposit customers with funds in a money market account, savings account, or CD.

The Cost of Financial Reform to Banks

The legislation imposes costs on banks in a number of ways, including the following:

  • Less profit potential from proprietary trading. This limitation will keep banks out of trouble in bad markets but will restrict the money they can make with deposits in good economic times.
  • Higher FDIC insurance assessments. A permanent increase in the Federal Deposit Insurance Corporation (FDIC) insurance limit should eventually mean an increase in the FDIC's levies on all banks to pay for the extra coverage. In particular, though, the new law targets banks with $10 billion or more in assets to take up more of the burden of paying FDIC fees.
  • Possible limits on payment card interchange fees. Banks charge retailers for transactions using their credit and debit cards. The new law directs the Federal Reserve to ensure that these fees, known as interchange fees, are reasonable.

The Cost of Financial Reform to Consumers

You can expect banks to pass along as many of the costs of financial regulation as possible if they can do so. Let's look at a few ways this could happen:

  • Lower bank rates. Interest rates on CDs, as well as rates on savings accounts and money market accounts, will still move with market conditions, but banks now have less incentive to offer higher rates to attract depositors. Restrictions on proprietary trading limit the high-profit (and high-risk) potential from investing customers' deposits, while higher FDIC assessments increase the cost of taking those deposits. Offering lower interest rates is a quiet way of recouping some of these costs or lost profit.
  • Less availability of debit cards. With overdraft fees already under pressure, if banks take a hit on interchange fees, they will find the debit card business much less profitable. One response could be to make them available to fewer customers--or to authorize their use at fewer merchants.
  • Higher checking account fees. Recent clampdowns on the fees banks charge for overdrafts and purchase transactions might lead banks to make money on checking accounts the more direct way--in the form of monthly maintenance fees. This could mean fewer free checking accounts and higher monthly maintenance fees overall.
  • Higher balance minimums for free services. If deposits are less attractive to banks and the cost of doing business is higher, expect to see rises in the thresholds for special services, from free checking to premium-level benefits.

While the financial reform law gives the appearance of charging banks--especially the larger ones--for all the costs, the reality is that many of those costs will undoubtedly find its way to you, the consumer. In return, though, there are provisions of the law which should legitimately protect consumers by creating a more stable financial system.

Here's hoping that, on balance, you get what you pay for.

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