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A Squandered Opportunity for Effective Consumer Protection?

| Regblog

The Great Recession devastated the American economy and disrupted the lives of millions of Americans who were laid off or lost their homes to foreclosure. In an effort to promote economic recovery and ward off another financial crisis, Congress passed legislation to reform the financial system and establish safeguards for American consumers. By many measures, the economy is now recovering, but a recent paper based on the congressional testimony of a law professor at George Mason University argues that the financial reform legislation is actually hampering economic growth.

Todd Zywicki maintains in his recent paper summarizing testimony given to the U.S. House of Representatives Financial Services Committee that, five years after its enactment, the recession-responsive legislation is failing to achieve its goal of protecting consumers and investors. He contends that several pieces of financial reform legislation are increasing inflation, reducing consumer choice, and limiting millions of Americans’ access to credit.

Zywicki first criticizes the Durbin Amendment for decreasing the availability of free checking accounts. He hails consumer access to free checking as “one of the most important pro-consumer innovations in the history of retail consumer financial services.”

The Durbin Amendment, passed as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, caps debit card interchange fees for banks with over $10 billion in assets. In a previous paper discussing the effect of the Durbin Amendment, Zywicki cites a Federal Reserve Board study finding that affected banks have in part offset the lost income from interchange fees by charging consumers for checking accounts. Furthermore, Zywicki argues that consumer access to free checking had increased more than seven-fold in the years leading up to the Great Recession – from under 10% in 2001 to 76% in 2009. In the wake of Dodd-Frank, however, he finds that only 38% of banks now offer free checking accounts.

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