Friday, December 27, 2013

Who bears the burden?

In his 2012 book The Sector Strategist, Timothy McIntosh explains who ultimately bears the burden of over-regulation.

From page 130:
Despite this enhanced government regulatory burden, the banking sector is continuing to return to well-being and is now looking outside the box to find new ways to make profits. Today, banks are implementing important modifications to the business models, all of which will ultimately increase costs for consumers. These alterations include higher fees on checking accounts and limitations on debit card use. The cancellation of rewards programs is also being implemented. All of these regulations have driven return on equity and net interest margin lower for most of the major U.S. banking institutions. For example, the FDIC announced that eight out of the10 largest banks in the United States---which together control more than half of all loans in the country---showed a decline in net interest margin during the first half of 2011. During the first quarter of 2011, the value of loans outstanding held by banks declined by nearly $127 billion. Banks are now searching for any alternative to return to higher revenue and profitability, including opening up smaller "lite-branches" (i.e., ATM-only locations) and reducing workforce at many branch locations.

And from pages 136-137:
In mid-2011, The Consumer Financial Protection Bureau released data showing that credit card late fees dropped from $901 million in January 2010 to $427 million in November 2010, due to a cap of $25 on the first late fee on an account and $35 for the second late fee within six months of the first offense. One of the major provisions of the Act was the imposition of new rules that prevented credit card issuers from penalizing cardholders for going over the card's limit amount, unless the cardholder desired that these charges be established. As a result of this alteration, many credit card issuers eradicated over-the-limit fees. These fees were as high as $39 before the new rules were put in place. A major negative for consumers of the Act was that credit card interest rates had risen from 13.26% to 14.27%, making it more difficult to find a card with a low interest rate today.

We all know this, right? Institutions will take whatever measures necessary to maintain their margins in the face of rising costs. Meaning, increased costs get passed on to employees and customers. Now why would an increase in the minimum wage be treated any differently? That's right, it wouldn't be...


  1. Sorry Marty, but I do not comprehend your final point about minimum wage vs. the banking margins. Could you explain further?

  2. The point being that companies, regardless of industry, will pass higher costs onto their employees (longer hours, more duties, less benefits, fewer and smaller [or no] future pay increases, fewer new jobs, etc) and customers (higher prices, lower quality) to maintain their profit margins. When a fast food franchise's labor costs rise by 38% (say, from $7.25/hr to $10/hr), it'll have to take such measures to remain profitable.