Are 'Bounced Check' Loans Really Loans? Theory, Evidence and Policy

Document Type

Article

Publication Date

11-2010

Department

School of Business

Abstract

This research addresses the controversial bank policy of paying – rather than bouncing – overdrawn checks, debits or ATM withdrawals. We argue that it should fall under lending regulations only if consumers use the program to get intentional loans. In contrast, if the program primarily applies to checking account activity then it should fall under checking account regulations. A model of precautionary balance holding and checking account customer data are used to estimate the likelihood of overdrafting. Predicted overdrafts are compared to actual overdrafts to conclude that 79% are explained by the model and thus thought to be mistakes due to the stochastic nature of household expenditures.

DOI

10.1016/j.qref.2010.06.001

First Page

492

Last Page

500

Volume

50

Issue

4

ISSN

10629769

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