Sunday, February 24, 2008

A goofy law

I assume that I'm no different from many people in that I maintain both a savings account and a checking account. Both pay pitiful interest right now, but the savings account is a bit less pitiful than the checking account, so we keep the bulk of our cash in the savings account and transfer money to checking to cover the checks we write. This obviously maximizes what little interest we get.

Last night, I discovered, that my bank had assessed a $10 "excess activity fee" for too many transfers over the past month. Huh? Upon a bit more research, I discovered that the bank is not just trying to hit me with a gotcha fee (although it sure feels like a gotcha because there was no warning when I did the transfers that I might incur this fee) - they're actually required to do this by the government! Yep, it's something called "Regulation D" that requires that they limit the number of electronic transfers I perform each month to 6. In fact, if I ever exceed the monthly limit a 3rd time, they have to close my account! So I now have one strike against me for the "crime" of trying to cover my checks.

The rationale for this actually does make a bit of sense. A bank needs to keep cash on hand to cover checks in a checking account, but they get a break on the reserves required for savings accounts because of these limits. I think the theory is that if the money is not fully accessible to customers, then the bank doesn't need to keep it on hand - i.e., they can lend it out and make money with it. Hence the need to actually draw a formal distinction between checking and savings accounts: it lets the bank more optimally figure out its required reserves, and maximize the amount of money available for lending.

While this may have made sense in the 1930s (when I believe these regulations were adopted), it has become a silly fiction today. There are two huge loopholes here. The first is that the limit only applies to telephone or internet exchanges. If I were to drag myself to an ATM or to a bank office, I can do a thousand transfers a day with no penalty. The second loophole, of course, is that there is no limit on the amount I can transfer at a time, so I can still write checks for a lot more than is in my checking account and do a big transfer to cover them, meaning that the checking account balance is actually a poor proxy for the amount of cash they need to keep in reserve.

It's the first loophole, though, that annoys me. The only difference I can see between an in-person or ATM transfer and an Internet or telephone transfer is convenience, so it seems to me that the regulations have the net effect of simply punishing convenience. What possible reason is there for that?

These regulations should be re-evaluated and reworked to address the risks and issues in the modern world. I'm not proposing looser regulations around monetary reserves, but it isn't the 1930s anymore, and the 1930s style solutions appear to be showing their age.

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