News in Brief

Profit Drives Behaviour

Banks have shareholders who want a dividend and growth. Professor Brian Melzer of Tuck Business School in the US has written a paper with Jennifer Dlugosz of the Federal Reserve Board of Governors and Donald Morgan of the Federal Reserve Bank of New York about the income earned from overdraft fees on bank accounts, $12 billion in 2019 in the US. In 2021 two bills were proposed to limit those fees with the intention of helping low income people afford bank accounts. The paper examines the law of unintended consequences and considers whether restricting overdraft fees might make banks less likely to provide bank account to low income households.

A specific set of circumstances in the US provided real life data of what happens with and without overdraft cost restrictions. In real life, when banks were able to charge higher overdraft fees, financial inclusion increased. Fees went up 10% but provision of overdraft credit rose by 16%. At the same time they lowered their minimum balance requirement, a requirement which ranks first in reasons the unbanked are without accounts, by 25%. The share of low income households with bank accounts rose 10%. These new accounts persisted for at least two years.