Bouncing out of the banking system: an empirical analysis of involuntary account closures

Banks closed over 30 million debit/checking consumer accounts involuntarily in 2001-2005 for excessive overdrafts, with these former bank customers having limited or no subsequent access to the formal banking system. Using a new county-level database, we analyze the determinants of these involuntary account closures, focusing on explanations relating to household economics and financial decision making ability, social capital, bank policies, and credit access through payday lending. Involuntary closures are more frequent in counties with a larger fraction of single mothers, lower education levels, lower wealth, and higher rates of unemployment. Social capital also matters, with closures higher in counties with higher rates of property crime and lower rates of electoral participation. Bank policies relate to closures, with more closures in counties with more competitive banking markets and more multi-market banks. Finally, using national data and a natural experiment, we find that access to payday lending leads to higher rates of involuntary account closure.