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Sunday, October 9, 2011

Dodd-Frank regulation had caused banks to lose revenue

Bank of America’s announcement that it will begin charging a $5 monthly fee on debit cards struck many as plain greed.

It generated umpteen headlines and a flood of customer feedback that reportedly crashed the bank’s Web site.

But the fee didn’t come from outer space. New regulations passed during the midst of the housing crisis and economic free fall offer a simple, if not necessarily satisfying, explanation.

The first regulation, formally called the Dodd-Frank Wall Street Reform and Consumer Protection Act, included an amendment from U.S. Sen. Dick Durbin, D-Ill., that halved the fees banks can charge retailers each time a customer swipes a debit card. The regulation cut the fees from 48 cents for an average purchase of $38 to 24 cents, costing banks $8-$10 billion a year.

Other federal regulations changed the ways banks are allowed to charge overdraft fees on checking accounts, costing them more money.

“The impact of both of these was to the banks’ revenues,” said state Banking Department Commissioner Ron Wilbur. “I think what we’re seeing is the banks’ attempt to restructure their revenue streams.”

Bank of America isn’t the only major institution to add new fees. Citibank announced recently it would add new fees to customer checking accounts that don’t meet certain balance benchmarks. Wells Fargo and Chase are testing the debit card charges, and some regional banks have already instituted it.

Banks say the fees are the consequence of the new federal rule that took effect Saturday.

“They’re looking for new ways to generate revenue,” said Michael Swack, a professor of economics and management at the University of New Hampshire.

Swack said it isn’t just regulations that are clamping down on too-big-to-fail banks’ profits. It’s also still tough to lend money, which brings in better revenue than the safe investments that are banks’ other option. That is also pushing banks to add new fees, he said.

“The squeeze that they’re feeling is that they have money to lend, but the guidelines are stricter, and there’s still nervousness about lending money in a soft economy,” Swack said.

Bank of America’s decision to add a $5 monthly fee to debit cards is hardly the first time a bank has added a new charge to customers. Karen Spohn, Rivier College associate professor of economics, said some of the reason Bank of America is getting so much attention is because its the awaited response to the new regulations. There are already a lot of eyes looking at what the big banks will do.

“I would think it’s related to all the reforms that are going on,” Spohn said. “It’s the reaction to the regulation that was put in place, or an expected reaction.”

Joseph G. Cote can be reached at 594-6415 or Also follow Cote on Twitter (@Telegraph_JoeC).