Earlier today, FedFin sent clients an analysis of Senate legislation that would give the USPS the legal authority its inspector-general already thinks it has to offer an array of new financial services. No wonder the door of my local post office now startlingly says, “We appreciate your business.” But, the USPS initiative raises a more fundamental question than whether any charm offensive can work fast enough to get the USPS into basic banking. As I look at what USPS contemplates and how the Senate bill would govern it, I wonder if we aren’t turning the Postal Service into a new-born GSE, only this time without even the patina of prudential regulation that allowed Fannie and Freddie to pretend they were solvent until they way weren’t.
As with the GSEs when they first burst loose in 1984, the USPS’s proposal is premised on unmet social need for financial services. Then as now, this is true. There are indeed tens of millions of Americans who either have no bank account or are otherwise deprived of prudent, lower-cost transaction, savings, and loan products. Access to these services would protect these vulnerable people and their families, just as it was said decades ago that lower-cost homeownership would stabilize communities and otherwise meet the “American dream.” The problem with the GSEs, just as it might prove for the USPS, isn’t that there isn’t unmet market need for certain types of financial services. It’s just that it’s unclear whether getting the government into the game – especially indirectly through a GSE or the USPS – is the right way to go. For Fannie and Freddie, it proved disastrous because the GSEs’ incentives and regulatory framework were ill-suited to handle the risk they took. Are these any more robust at the USPS?
The USPS’s plea for new products came in a recent, detailed report from its Office of the Inspector General (OIG). Positing annual income of a rather tidy $8.9 billion from its new ventures, OIG says with regard to regulation only that it “could” apply to the USPS. And, the regulations it mentions here appear to reference only consumer-protection ones mandated by the CFPB. There’s no talk of prudential regulation even though many of the products USPS contemplates include walloping amounts of credit and operational risk. Would USPS set aside reserves and capital for all these risks? Who would ensure that its products – one of which might be a Bitcoin exchange – are not only prudent from a risk-management perspective, but also safe for the retail customer? If the standards governing bank-customer security, privacy, and redress rights don’t apply to USPS offerings, vulnerable customers might be the last to know. And, in services like Bitcoins, if its customers are also money laundering or similarly villainous sorts, USPS might similarly be the last to know if they are exempt from all the rules applied to private-sector financial institutions. And, if USPS erred on something like the AML rules, who would punish it?
All of this is worrisome and then some. But, the most troubling thing about the USPS’s plans is the implicit guarantee most customers would assume they get when they do business with an office with eagles on every mail-box. We learned the very hard way how risky it is to assume an implicit federal backstop since it turns out that taxpayers honor it every time.
If the USPS is allowed into the retail-banking game, it’s critical not only that it do so under the full panoply of prudential and protection rules that apply to federally-regulated providers like banks, but also that any product that puts consumers at risk is either barred from the USPS line-up or backstopped by private capital sufficient to insulate the federal government from what seems the inevitable downfall of any government-like entity that thinks it can be a bank.