Bouncing Out of the Banking System: An Empirical Analysis of Involuntary Bank Account Closures

Using a new database, we document the factors that relate to the extent of involuntary consumer bank account closure resulting from excessive overdraft activity. Consumers who have accounts involuntarily closed for overdraft activity may have limited or no access to the formal banking system. In the period 2000 through 2005, there were approximately 30 million checking accounts reportedly closed for excessive overdrafting. Closure rates jointly reflect (a) financial mismanagement on the behalf of families and (b) bank forbearance policies regarding overdrawn customers. We focus on five factors to explain the incidence of involuntary closures: personal traits, community traits, economic trends, bank policies, and credit access through the alternative financial services sector. We find that involuntary closures are most frequent in U.S. counties with high rates of households headed by single mothers, low levels of college education, high rates of property crime, a strong presence of multi-market vs. local banks, higher levels of competition among banks, and low rates of electoral participation. Negative shocks to income and rates of employment are also associated with increases in closure activity within counties over time. We interpret these results as consistent with involuntary consumer account closures being jointly driven by thin margins between income and expenditures, general consumer inability to budget and forecast, bank incentives, and community norms and social capital. Furthermore, using both national data and a natural experiment, we find that access to payday lending seems to lead to higher rates of involuntary account closure.