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Are "bounced check loans" really loans? Theory, evidence and policy

  • Fusaro, Marc Anthony
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    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.

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    File URL: http://www.sciencedirect.com/science/article/B6W5X-50BJNVR-1/2/28c352918cc99e54438ab09502a584c2
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    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 50 (2010)
    Issue (Month): 4 (November)
    Pages: 492-500

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    Handle: RePEc:eee:quaeco:v:50:y:2010:i:4:p:492-500
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620167

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    1. Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "Money, Credit and Banking," IEW - Working Papers 219, Institute for Empirical Research in Economics - University of Zurich.
    2. Bar-Ilan, A., 1988. "Overdrafts And The Demand For Money," Papers 34-88, Tel Aviv.
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    4. Marc Fusaro & Richard Ericson, 2010. "The Welfare Economics of “Bounce Protection” Programs," Journal of Consumer Policy, Springer, vol. 33(1), pages 55-73, March.
    5. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2007. "The Age of Reason: Financial Decisions Over the Lifecycle," NBER Working Papers 13191, National Bureau of Economic Research, Inc.
    6. John V. Duca & William C. Whitesell, 1991. "Credit cards and money demand: a cross-sectional study," Research Paper 9112, Federal Reserve Bank of Dallas.
    7. Frenkel, Jacob A & Jovanovic, Boyan, 1980. "On Transactions and Precautionary Demand for Money," The Quarterly Journal of Economics, MIT Press, vol. 95(1), pages 25-43, August.
    8. Sciortino, John J. & Huston, John H. & Spencer, Roger W., 1987. "Perceived risk and the precautionary demand for money," Journal of Economic Psychology, Elsevier, vol. 8(3), pages 339-346, September.
    9. Miquel Faig & Belén Jerez, 2007. "Precautionary Balances and the Velocity of Circulation of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 843-873, 06.
    10. Tsiang, S C, 1969. "The Precautionary Demand for Money: An Inventory Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 77(1), pages 99-117, Jan./Feb..
    11. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, vol. 56(4), pages 247-272.
    12. Milbourne, Ross, 1983. "Optimal Money Holding under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 685-98, October.
    13. Marc Fusaro, 2008. "Hidden Consumer Loans: An Analysis of Implicit Interest Rates on Bounced Checks," Journal of Family and Economic Issues, Springer, vol. 29(2), pages 251-263, June.
    14. Marc Fusaro, 2009. "The rank, stock, order and epidemic effects of technology adoption: an empirical study of bounce protection programs," The Journal of Technology Transfer, Springer, vol. 34(1), pages 24-42, February.
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