Regulatory incentives and consolidation: the case of commercial bank mergers and the Community Reinvestment Act
AbstractBank regulators are required to consider a bank’s record of providing credit to low- and moderate-income neighborhoods and individuals in approving bank applications for mergers and acquisitions. We test the hypothesis that banks strategically prepare for the regulatory and public scrutiny associated with a merger or acquisition by increasing their lending to low-and moderate-income individuals in anticipation of acquiring another institution. We find evidence in favor of this hypothesis. In particular, we show that the higher the percentage of the institution’s mortgage originations in a given year that are directed to low- and moderate-income individuals or neighborhoods, the greater the probability that the institution will acquire another bank in the following year. Further investigation bolsters the view that this correlation is due to banks’ anticipation of the public and regulatory scrutiny during the merger review process. The effect cannot be explained by other bank characteristics. The relationship is observed for acquiring banks, which are the focus of public and regulatory scrutiny, but not for the banks that are being acquired. In addition, the positive effect of lending to low- and moderate-income individuals and neighborhoods on the likelihood that a bank will acquire another bank increases over the 1991 - 1995 time frame, a period when public and regulatory scrutiny of an institution’s community lending record increased. The effect of lending to low- and moderate-income individuals and neighborhoods is also largest for big banks, who face particularly intense public and regulatory scrutiny
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Bibliographic InfoPaper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-02-06.
Date of creation: 2002
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- Bostic Raphael & Paulson Anna L & Mehran Hamid & Saidenberg Marc, 2005. "Regulatory Incentives and Consolidation: The Case of Commercial Bank Mergers and the Community Reinvestment Act," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-27, April.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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