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Limit on Bank Fee Won't be Painless

From: "Limit on Bank Fee Won't be Painless", New York Times, 11/26/09

Regulators and politicians are competing to rein in bank overdraft fees. The Federal Reserve decided this month that banks must receive customers’ consent before allowing them to overdraw their accounts. Other proposals in Congress go even further, limiting charges or prescribing the structure of fees.

Whatever changes come, however, customers this holiday season should not expect any free gifts from their banks.

Financial institutions have been collecting up to $30 billion a year in overdraft fees, according to the management consultants Oliver Wyman. Furthermore, the fees have been a big source of profit, accounting for nearly a fifth of the black ink at depository institutions in recent years.

Unfortunately, however, there is some evidence of questionable behavior on the part of banks. For starters, they have typically let customers overdraw without warning. Then the fees have kicked in, with disproportionate effect — 10 percent of customers pay up to 90 percent of overdraft-related fees, according to the economic research firm Moebs Services.
Alert customers would know when they were about to drain their accounts. And the banking industry points out that allowing automatic overdrafts in return for fees is convenient for many people, and relatively cheap compared with the hefty charges sometimes attached to returned checks.

With tighter restrictions coming on overdraft fees, some banks are already reducing charges. If that’s all there was to it, consumer and business customers would most likely be better off.

More likely, bank customers will end up paying in other ways. Even if they avoid writing checks that bounce, account maintenance fees may increase and banks could charge more for borrowing.

Or they may simply turn customers away — especially those with low balances that aren’t profitable without fee income — perhaps forcing them to other, far more predatory forms of lending.

That would not be a desirable outcome. On the other hand, moves like the Fed’s at least give customers a choice about paying for overdrafts. Given that excessive lending to weak credit was one cause of the recent crisis, that’s probably a better approach than forcing banks to reduce overdraft fees too much. Some new restrictions make sense, but they are unlikely to be painless for banks’ customers.

Mexico’s Fiscal Woes

Fitch’s downgrade this week of Mexico’s credit rating by a notch, to BBB, was a warning. Mexico has too many problems to keep going the way it has.

Oil production from Pemex, the state-owned monopoly operator, averaged 2.61 million barrels a day in 2009, down 7 percent from 2008 and 22 percent from the 2004 peak. Although Pemex budgeted $19 billion for deepwater exploration in 2009, no new large fields have been found, and the company has $50 billion in debt. In 2008, Mexico’s Congress rejected a proposal from President Felipe Calderón to allow some foreign investment in oil exploration.

Pemex needs some help. Its production is declining and exports are falling even faster; it is down 13 percent from 2008 and 35 percent from 2004. With Mexico’s population growing 1.1 percent annually, domestic consumption very likely will rise over time, although the recession has brought it down this year. The only good news for the Mexican government, which depends heavily on revenue from Pemex, is that the current oil price is well above the $59 a barrel assumed in budget calculations.

In a few years — or earlier if oil prices decline — Mexico faces a serious fiscal crisis. The combination of unequal income distribution and high tax evasion are limiting the government’s non-oil revenue to 10.8 percent of gross domestic product, well below the average for middle-income countries. The national economy has the same sort of problem as government. Mexican productivity remains below its 1980 level.

Mexico’s most pro-market party has been in power since 2000, yet little has been achieved, particularly in relation to Pemex. It doesn’t help that the legislature is controlled by the opposition, but the more fundamental issues are the persistence of a generally antimarket political tradition, and hefty doses of crime and corruption. Change isn’t likely without a crisis, but that might come distressingly soon.

Written By: rnybeck
Date Posted: 3/3/2010
Number of Views: 2429

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