The Fed gets religion (well, a little)

It's amazing the things that people and organizations will do when they perceive that their way of life or their very existence is being threatened. Such is the case with the recent announcement that the Federal Reserve will soon require banks to offer overdraft "protection" as an "opt-in" service rather than as a default choice for customers who have complained loudly about $35 cappuccinos in recent years.

The details are in this report from the Washington Post:

The new regulations, announced Thursday, cover overdrafts from ATM withdrawals and debit card purchases, which account for roughly half of overdrawn transactions, and help to address widespread complaints that consumers who were unaware they had insufficient funds were being charged exorbitant fees for purchasing a cup of coffee, for example. The rules, which take effect July 1, 2010, come as banks have drawn increasing scrutiny in the wake of the financial crisis for charging high fees and interest rates at a time when consumers are financially strapped.

Banks will be required to send customers a notice explaining their overdraft protection services and fees before they are asked if they want to sign up. But the regulations do not cover payments made by check or recurring debit card charges, such as automatic bill payments. They also give banks wide latitude over the structure of overdraft fees once customers opt in, though Fed officials said the regulations allow consumers to drop the service at any time. Two bills targeting the fees are under consideration by Congress and would place tougher restrictions on the industry.

No wonder more and more people are shunning plastic money and opting instead to use good 'ol fashioned cash for their day to day expenses.

From personal experience I can tell you that, once you get used to setting aside some cash every month for your routine out-of-pocket expenses, you'll never go back.

And you'll sure never need overdraft protection.

The odd collection of receipts that may or may not get matched up against your bank statement at the end of the month is another plus.

Anyway, there's at least some progress being made to rein in bank fees and curb excesses now that Ron Paul and others in Congress have put a little fear in Ben Bernanke's belly.

Since the financial crisis began, the Fed has been under pressure to demonstrate its concern for protecting consumers and has imposed new limits on mortgage and credit card lenders. The recent spurt of rulemaking follows a decade of inaction during which the Fed ignored mounting evidence of abuses and repeated pleas from consumer advocates. As a result, the Obama administration wants to strip the Fed of some of its responsibilities and create a new agency devoted to protecting consumers. Fed Chairman Ben S. Bernanke has declined to take a public position on the proposal, but he has highlighted the Fed's recent actions as evidence that the institution is aware of its past shortcomings and working to improve.

Fed officials said Thursday that they had been working for several years to refine their regulations on overdraft charges, which infuriate consumers but are a significant revenue stream for banks. Fees from overdrawn U.S. accounts will reach $38.5 billion this year, up from $36.7 billion in 2008, according to research firm Moebs Services in Lake Bluff, Ill. A survey of smaller banks released by the Federal Deposit Insurance Corp. last year showed that about a quarter of accounts had been overdrawn at least once in 2006, the year the study was performed.

Edward L. Yingling, chief executive of the American Bankers Association, a trade group, said the regulations strike a balance between consumer concerns and industry needs. But the group also said its members will be hard-pressed to find replacements for that revenue, especially as the recent wave of financial reforms has limited their ability to charge riskier customers higher fees and higher interest rates for loans. That could mean banks will begin considering charging for popular services that they had provided for free, such as checking and no-minimum-balance accounts.

Conventional wisdom has it that the U.S. economy will not make a complete recovery until the U.S. banking system does.

Sometimes you have to wonder if, maybe, the U.S. economy will not make a complete recovery until the banking system as we know it ceases to exist.

This is a good, albeit tiny, step in that direction.