With Hillary Clinton’s victory as assured as anything can be in American politics these days, it’s time to turn from electoral politics to policy impact. 2017 will be a transformational year for U.S. financial regulation, a forecast we will lay out in detail over the next few weeks. Here, though, a preview of one progressive idea – turning the U.S. Postal Service into a U.S. retail bank – and why I think Clinton centrists will unite with Sanders/Warren progressives to redefine U.S. consumer finance. Why would going postal go viral?
Progressives such as Sens. Sanders and Warren have espoused postal banking – Sen. Sanders with particular fervor during the campaign – following a 2014 report from the USPS Inspector-General laying out how USPS could get into the business, the services it could offer, and how doing so would alleviate USPS’s grievous financial woes. Sen. Warren then introduced legislation to kick this off.
Although the policy impact of shifting targeted services back from the private sector to the post office is not only significant, but also debatable, the politics of doing so is remarkably straightforward: progressives really want it and centrists focused on the structure of U.S. finance and wholesale-market infrastructure would gladly trade products some big banks don’t want any more for political cover for rejecting changes centrists strongly oppose – Glass-Steagall reinstatement as a case in point. The Wells Fargo case plays an important role here – progressives will use it to argue as Sen. Warren is already loudly doing – that big banks can’t be trusted with the little people’s money. Big banks will split on this issue and small banks strongly oppose a new postal bank, but strong voices supporting it combined with an array of regulatory and market forces push in favor of the post office.
Another important feature of postal banking in the U.S. under a Clinton Administration is its interplay with a top-priority item: an infrastructure bank. Put all this money into the USPS and it has to go somewhere. Perhaps a bit of small-business lending with an SBA guarantee would be on offer, but the USPS’s own infrastructure doesn’t sustain any service that requires more than a simple “thank you” upon consumer inquiry. Even that’s darn hard to get in my post office. Yes, I know – it’s risky to fund long-term projects with overnight money, but that’s where being the USPS will come in darn handy. Liquidity shortfalls can be far better managed there by dint of an explicit federal backstop – sure to come, we think with a new USPS bank and likely scoring as a revenue-raiser to boot.
Put another way, if something has to be thrown to progressives – and a lot will in coming years – then low-dollar, high-cost deposit-taking and remittance services are it. Now to the market impact and why some big banks wouldn’t necessarily object to this shift.
The key to gathering high-cost deposits is putting this money to use in financial intermediation and cross-selling fee-based services along the way. The BHCs with assets over $50 billion and especially for U.S. GSIBs, both of these benefits to retail deposit-taking are eroding, if not almost evaporated. Normalized interest rates that promote higher net interest margins will reverse a bit of this strategic shift, but not all that much absent an accompanying regulatory rewrite, which we do not foresee.
Several recent FedFin papers have documented the problems bigger banks have deploying core deposits. The smaller the deposit, the higher its efficiency cost and thus the greater the downward drag of requirements such as FDIC premiums, leverage capital, and all of the regulatory costs of operating a massive branching network in accordance with standards that often mandate physical facilities where market realities say no. Post offices have no market realities and massive “store” infrastructures – for giant banks, much of this is extraordinarily costly now that all of the new rules are in full force and likely if anything only to get stronger.
The emerging structure of digital finance also pushes back hard against physical infrastructure. The largest banks are rapidly building sophisticated mobile-payment services, experimenting with chat rooms, and developing digital-advisory services that reach the “mass affluent” in ways few financial institutions are likely to match.
The liquidity rules of course create strong incentives for core deposits, but TLAC for GSIBs will crowd some of this out absent order-of-magnitude growth in loan demand. Improved returns and less volatility in the high-quality liquid asset sector – especially if this comes with larger supplies of short-term Treasuries – also provides places to put deposits without the need to pay a high direct-and-regulatory cost to get them.
In short, where is the value add in U.S. retail finance on a going-forward basis? With all the fintech and regulatory changes well under way and almost surely irreversible, it’s not in operating thousands and thousands of physical branches staffed by low-cost, often low-quality and even high-risk product-delivery personnel. Just as department stores learned to give up selling everything to everyone when mass-discounters like Costco came along, so large diversified banks are likely to let money-losers loose so they can instead focus on the challenging task of improving return on equity in higher-income consumer and corporate arenas.
Is this good for income equality? Another FedFin study and a speech I will give next week say no. But thus it is.