An exploratory study with roll rate analysis on current/checking account balance: Is there an absorbing state of distress?

Financial behaviour of individuals fluctuates in line with their circumstances, income and changing economic conditions. Before experiencing a serious financial distress, individuals may face varying levels of transient financial difficulty. There are no universally accepted guidelines for an objective measurement of distress or for defining different stages of financial difficulty. This presentation proposes financial difficulty levels based on negative balance of current (checking) accounts. We define four ordinal states of increasing dependence on overdraft use that imply incremental financial difficulty risk. Roll rate analysis is conducted to examine the proportion of accounts transitioning from one state to another and to investigate whether there exists a state of persistent negative balance to be defined as ‘distress’. The results show that the accounts have a higher tendency to stay in the initial state or improve to a relatively lower risk state instead of deteriorating. We also notice accounts could always recover to the lowest risk state despite being in the highest risk state previously. This suggests that overdraft use scenarios observed from cashflow transactions do not explicitly relate to distress but can better depict transient vulnerabilities i.e., temporary financial struggles. Further work will focus on identifying early warning signs of deteriorating financial conditions and predicting the transitions between the financial states from past transactional behaviour.