Today, TARP Congressional Oversight Panel Chair and Harvard Law Professor Elizabeth Warren has an op-ed in the Wall Street Journal urging Washington not to abandon the consumer financial protection agency. It's an interesting piece. I agree with some aspects and disagree with others. But I was kind of shaken right from the start, when I realized I had trouble accepting her very first assertion: that banking is based on trust.

Warren begins:

Banking is based on trust. The banks get our paychecks and hold our savings; they know where we spend our money and they keep it private. If we don't trust them, the whole system breaks down. Yet for years, Wall Street CEOs have thrown away customer trust like so much worthless trash.



Since the piece that this serves as the first paragraph for largely argues for the need of a consumer financial protection agency, the relevant question I'd ask is: do consumers pick a bank based on trust? Empirical observation leads me to say, not really.

Look at consumer banking. There are a few behemoths out there that have an enormous market share. According to the FDIC, if you look at the top-50 institutions by deposits (at least $12.5 billion), then just four hold 55% of deposits in the U.S.: Bank of America, Wells Fargo, JPMorgan and Citigroup. Do Americans favor these giant banks because of trust?

I doubt it. If you mean trust as safety, then I think consumers rate most banks on equal footing -- as long as the FDIC is there to insure their deposits, then there's nothing to worry about. Few Americans have more than $250,000 in a savings account.

If you mean trust as a strong relationship, you draw a similar conclusion. Big banks view customers as a number: there's no personal connection. Anyone who banks with one of these titans almost certainly doesn't do so because of the trust that's been developed over the years through their great relationship -- it's for other reasons.

What are some of those reasons? Convenience is a big one. It's great to have your bank's ATMs all over the place. It's nice to be able to talk to a customer service rep 24-7. Another reason is probably the deals these banks offer. They can more easily offer cheaper products than others due to economics of scale.

So I would assert that people view banking just like other consumer products: they want convenience and good deals. They're willing to accept all the negatives that consequently follow, like a weaker relationship with the bank and the poor treatment that sometimes follows. I noted this consumer phenomenon before more generally, and I think it holds up for banks as well.

Warren uses this premise to launch into an argument that a consumer financial protection agency must be established to restore trust. Maybe that's true, if trust is, indeed, important to consumer banking. I'm just not convinced that it is.

Instead, such an agency would likely just make banks' services more expensive for the majority of customers -- which would bother them, since cost is likely a reason for why they chose their bank. Most people who enjoy cheap products do so at the cost of those who are less sophisticated and pay a high price for their lack of savvy. I wrote about this in regard to overdraft fees recently.

While that might be a moral wrong that should be righted, I'm not sure that most consumers really care. For example, if you're always responsible enough to never incur an overdraft fee, then you probably don't care how high they are. After all, the majority benefits when banks use "tricks" and "clever" tactics to squeeze those few consumers who don't know any better.

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