Diego Zuluaga on Libra, Real-time Payments, and the Legacy of the Community Reinvestment Act

Episode Summary

Executive Summary: David Beckworth and Diego Zuluaga discuss the fragmented U.S. banking system, real-time payments, fintech, cryptocurrencies, Libra, and the Community Reinvestment Act (CRA). Zuluaga argues that bank fragmentation and regulation have distorted competition, fintech is reshaping finance, Libra is more a payment network than a currency, and the CRA is increasingly outdated and often benefits higher-income gentrifiers rather than its intended borrowers.

Main Topics: Career path and policy analysis (Priority: 3/5): Zuluaga explains how his background in economics, financial history, and think tank work led him into financial-regulation policy, first in the UK and later in the U.S. Fragmentation of U.S. banking (Priority: 5/5): The conversation frames U.S. banking as unusually fragmented due to branching restrictions and unit banking, with lasting effects on competition, bank size, and policy debates. Real-time payments and Fed involvement (Priority: 4/5): Beckworth and Zuluaga examine whether the Federal Reserve should build a real-time payments system or leave it to private-sector consortia, focusing on ubiquity, costs, and incentives. Fintech and the future of banking (Priority: 5/5): Zuluaga defines fintech as technology-enabled financial services and argues that lower costs, data aggregation, and open banking are shifting lending and payments away from traditional depository institutions. Cryptocurrencies and Libra (Priority: 4/5): The discussion distinguishes decentralized crypto like Bitcoin from Facebook-led Libra, which Zuluaga sees primarily as a payments system with major network and inclusion potential. The Community Reinvestment Act (CRA) (Priority: 5/5): Zuluaga presents research showing CRA lending in Washington, DC disproportionately benefits high-income borrowers in low-income areas and may not achieve the law’s intended goals. CRA reform and policy alternatives (Priority: 4/5): He suggests updating or even repealing the CRA, and if retained, letting banks satisfy obligations through specialized third parties such as fintechs or community development financial institutions.

Key Arguments: U.S. banking is structurally fragmented, and that fragmentation distorts competition, raises costs, and shapes modern debates from payments to housing finance. The private sector is likely better positioned than the Fed to provide real-time payments, though the Fed’s ubiquity argument has some merit. Open banking and data portability can increase competition and consumer choice by allowing customers to move their financial history across providers. Fintechs are taking share from banks because technology lowers costs and regulation raises them; an NBER study cited that about 60% of the post-2007 shift from bank to nonbank lending was due to technology and about 30% to regulation. Cryptocurrencies are too heterogeneous to be treated as one category; Bitcoin is decentralized, while Libra is intermediary-based and better understood as a payment network. Libra’s biggest strengths are inclusion, low-cost payments, and potential reach to unbanked users, not replacing sovereign currencies. The CRA is miscalibrated because it evaluates lending by census tract as well as borrower income, allowing banks to satisfy goals by lending to high-income gentrifiers in low-income neighborhoods. CRA lending is not a major cause of the 2008 crisis; the main problems came from non-CRA mortgage channels and from Fannie/Freddie affordability mandates rather than the CRA itself. If the CRA remains, banks should be allowed to outsource qualifying lending to specialized institutions that actually serve underserved borrowers and retain the loans on balance sheet.

Data Points: Macro Musings hotline number: 802-466-2276 - Podcast announcement inviting listener questions Email contact: [email protected] - Podcast announcement inviting listener questions U.S. commercial banks and thrifts: more than 5,000 - Zuluaga describes the scale of fragmentation in U.S. banking U.K. deposit concentration: 80% of deposits held by the five or six largest banks - Used as a comparison to the U.S. banking structure Real-time payments Fed target date: 2024–2025 - Fed’s proposed timeline for its own real-time payments system Clearinghouse deposit coverage: about 50% of deposits - Private consortium already providing real-time payments U.S. population paycheck-to-paycheck: between a quarter and half - Motivation for real-time payments and financial inclusion Share of bank lending decline explained by technology: about 60% - NBER paper on the rise of nonbank/fintech lending since 2007 Share of bank lending decline explained by regulation: about 30% - NBER paper on the rise of nonbank/fintech lending since 2007 Cryptocurrency projects in existence: about 1,800 - Zuluaga’s estimate when discussing the crypto landscape Bitcoin launch year: 2009 - Introduced as the first cryptocurrency Bitcoin market share: about half of the global cryptocurrency market - Used to show Bitcoin’s dominance U.S. households without a bank account: about 8 million - Illustrates demand for alternative payment systems like Libra People worldwide without a bank account: about 2 billion - Illustrates global inclusion potential for digital payment networks U.S. cell phone penetration: about 96% of the population - Used to compare tech access with banking access U.S. households with bank accounts: about 90–92% - Shows that banking access lags mobile access Remittance fees: 7% to 10% - Cost burden faced by immigrants sending money home Merchant card transaction fees: 100 to 200 basis points - Motivation for cheaper payment alternatives like Libra Visa and MasterCard share of card business: about 80% - Shows dominance in payment cards and incentives for disruption CRA passage year: 1977 - Historical origin of the Community Reinvestment Act Local census tracts: about 4,000 people each - Regulatory unit used in CRA evaluations CRA lending in DC going to gentrifiers: more than two-thirds - Main empirical finding in Zuluaga’s research Effect of additional CRA mortgage lending on minority share: 3% decline per 1 percentage point increase - Track-level estimate from the DC-area analysis Share of FHA-backed low-income mortgages originated by fintechs: about three quarters - Used to show CRA scope is shrinking Fintech share of mortgage market: about 30% to 40% - Indicates rising nonbank competition in mortgage lending CRA evaluation default risk study: 15% more likely to default - Cited study finding marginal loans made before a CRA exam were riskier

Pivotal Quotes: "The key word about the U.S. banking system is fragmented." — Diego Zuluaga: His broad characterization of the American banking landscape "More than two-thirds of CRA lending is going to high-income borrowers in low-income areas, the people I call the gentrifiers." — Diego Zuluaga: Explaining his central empirical finding on CRA outcomes in Washington, DC "Libra is more of a payment system than an alternative currency." — David Beckworth: Beckworth’s synthesis after discussing Facebook’s digital currency proposal

Implications: Fintech, open banking, and private payment networks are likely to keep eroding traditional bank dominance. The CRA may need major reform because current rules are increasingly misaligned with how credit is actually supplied and who benefits.