Q&A: Will Reform Increase My Bank Fees?

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Question: I’ve heard a lot about the new credit card rules that just went into effect, but what about the new rules on banks? Will I get a break on bank fees? — J. Stocke, Lawrenceville, N.J.

Answer: Probably not, and I’ll get to the reason why in a moment.

Let’s set the table first. On Jan. 14, President Obama, seeking to strike a populist pitch, announced a plan to slap $90 billion worth of fees on banks that participated in the federal government’s Troubled Asset Relief Program (TARP).

Calling big banks “fat cats,” Obama specifically called for a fee of 0.15% on big bank balance sheets on with assets topping $50 billion. White House economists expect that such a fee would raise $90 billion over 10 years. The fee would primarily impact bigger banks like Bank of America (Stock Quote: BAC), Wells Fargo (Stock Quote: WFC) and Morgan Stanley (Stock Quote: MS).

But back to your question. Typically, when the government slaps a levy on businesses, those businesses turn around and pass the added cost along to customers in the form of higher prices for service and, in the case of banks, higher bank fees and penalties. Industry workers and investors would be negatively impacted, too.

That seems to be the case here. According to a report released this week by the U.S. Congressional Budget Office, the Obama plan would not only hike bank fees, but also further restrict effected banks from making loans. Citing the impact on banks as a “small” one, the CBO said the ultimate financial burden would fall on bank customers and employees. The CBO reported that bank customers would face higher borrowing rates, while industry employees could face layoffs and pay cuts.

“The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees and investors, but the precise incidence among those groups is uncertain,” the CBO reported in a letter yesterday to U.S. Sen. Charles Grassley, R-Iowa.

The letter went on to say, "Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed to borrowers. Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses, if they did not have better employment opportunities available to them. Investors could bear some of the cost in the form of lower prices of their stock if the fee reduced the institution's future profits."

Credit may be negatively impacted, too. Bank officials say that every $1 you pull out of banks leads to $10 that banks won’t lend. Said one industry executive in a January interview with Politico.com; “The money to be collected is capital being pulled out of the banking system that could support ten times the amount in new lending. That's because $1 in capital supports $10 or more in lending. So the tax will pull not $90 billion in lending capacity out of the banking system, but $1 trillion in potential lending.”

So while the White House’s intent might be on the up-and-up, its math doesn’t add up — at least for bank customers.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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