Apr 13 2010

Overdraft Regulation: A Silver Lining to the Clouds?

Report  
Number  
211

This research brief reviews the Federal Reserve Board (FRB) and National Credit
Union Administration (NCUA) regulations and proposed legislation and considers their likely impact on credit unions.

Adam J. Levitin
Associate Professor
Georgetown University Law Center
Report Number 211

Executive Summary

Unlike with an avoidable airplane crash or the collapse of a bridge, there was no public moment that sealed the fate of laissez-faire over-draft rules. Instead, new rules have been written by increasingly cautious regulators responding to consumer anger over lending practices, government bailouts, and inscrutable banking fees. Fully 50 million Americans paid overdraft fees in the 12 months running through mid-2009. And the poorest 10% of Americans pay 90% of the fees.

As suggested by the title, Levitin recognizes the significant changes that will flow from the new rules and provides specific insights on the financial effects of the changes on individual credit unions, but he also offers clear options for plotting a course through this new bank of clouds.

What is the research about?

This report compares a 185-respondent credit union survey with in-depth legal and marketplace research. The result: an analysis of the proximate changes and an estimate of their effects on credit unions. Using far-ranging research and the results from Filene’s in-depth survey, Levitin finds that:

  • For those credit union members who do overdraft, overdrafts are quite common. The median (mean) percentage of members with multiple overdrafts is 11% 19.13%). Repeat overdrafters are clearly the most profitable: Of those who paid overdraft fees in 2009, the median total paid was $238.25.
  • Assuming, in a worst-case scenario, that no members who do not currently opt in to overdraft would opt in, total fee income could sink by 11%.
  • From 2004–2009Q2, the loss of all overdraft revenue from debit and ATM transactions would have had an impact of around 9 basis points (bps) on credit union ROA.

The silver lining is that bank reactions to the new rule could make credit union checking accounts clear marketplace winners. Levitin also includes a half-dozen strategies for playing on this new regulatory field.

What are the credit union implications?

The overdraft rule and the overdraft bills would have very different impacts on credit unions. The financial impact of the overdraft rule will largely depend on the opt-in rate credit unions achieve, particularly among the subset of members who generate the most overdrafts.

The report suggests that the worst-case implications of the overdraft rule would entail a tangible drag on earnings, but it should not destroy the current business model. The overdraft bills, the futures of which are uncertain, would almost certainly be much harder to swallow.