Bank of America: Principles of Government Regulation

Bank of America announced yesterday that it will start charging customers who use their Bank of America debit cards a fee of $5 a month. The New York Times reports that other banks are already testing similar fees. The Dodd-Frank Act restricted the fees that banks may charge merchants for debit-card transactions. Unable to charge merchants more, the banks have turned to the other side of those debit-card transactions, the consumers.

These changes illustrate two principles of government regulation. First, the government cannot legislate costs out of existence. The cost to banks of handling debit card transactions doesn’t go away just because Congress wants it to. And a decision by Congress as to how much debit card transactions should cost doesn’t change the market. If banks can’t charge merchants, they will try to recover from consumers. If the government next limits what banks can charge debit-card consumers, they will try to cover their costs by raising other banking costs. If they can’t do that, bank shareholders will bear the cost.

Second, government regulation often has unintended consequences. I’m pretty sure that whoever came up with the limit on merchant charges didn’t intend for consumers to pay more. But it’s very hard to control how people respond to regulation. It’s like a balloon: squeeze it at one point and it bulges out at another point. And, no matter how hard you try, you can’t legislate to prevent all the possible bulges.

-Steve Bradford