[mnemonicsloth]

Regulations that lower the penalties for overdrafting will likely raise demand.

No, this is wrong.

You can't get away with a simple supply-demand analysis here because the demand curve for overdrafts doesn't slope downwards. After you've incurred an overdraft penalty (or two, or ten), you're more likely to incur further overdraft penalties. Even if you dig yourself out of the hole, you still have less money than you would have, so you're closer to overdrafting again than you would have been, and this tendency increases with the size of the overdraft fee.

This isn't to say that you can't discourage overdrafting with really big fees, but the relationship is going to be complicated, and the opposite outcome is also possible.