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Regulatory incentives and consolidation: the case of commercial bank mergers and the Community Reinvestment Act

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Author Info

  • Raphael Bostic
  • Hamid Mehran
  • Anna Paulson
  • Marc Saidenberg

Abstract

Bank 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 Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-02-06.

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Date of creation: 2002
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Handle: RePEc:fip:fedhwp:wp-02-06

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Related research

Keywords: Bank mergers ; Bank supervision ; Community Reinvestment Act of 1977;

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References

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  1. Douglas D. Evanoff & Lewis M. Segal, 1996. "CRA and fair lending regulations: resulting trends in mortgage lending," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 19-46.
  2. Glenn Canner & Wayne Passmore, 1997. "The Community Reinvestment Act and the profitability of mortgage-oriented banks," Finance and Economics Discussion Series 1997-7, Board of Governors of the Federal Reserve System (U.S.).
  3. Glenn B. Canner & Dolores S. Smith, 1991. "Home Mortgage Disclosure Act: expanded data on residential lending," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 859-881.
  4. Anthony W. Cyrnak, 1998. "Bank merger policy and the new CRA data," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Sep, pages 703-715.
  5. Christopher P. Beshouri & Dennis C. Glennon, 1996. "CRA as "market development" or "tax": an analysis of lending decisions and economic development," Proceedings 523, Federal Reserve Bank of Chicago.
  6. Robert B. Avery & Patricia E. Beeson & Mark S. Sniderman, 1997. "Information dynamics and CRA strategy," Economic Commentary, Federal Reserve Bank of Cleveland, issue Feb.
  7. Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 1999. "Trends in home purchase lending: consolidation and the Community Reinvestment Act," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 81-102.
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Cited by:
  1. Julia Sass Rubin, 2009. "Shifting ground: Can community development loan funds continue to serve the neediest borrowers?," Community Development Investment Center Working Paper 2009-01, Federal Reserve Bank of San Francisco.
  2. Christian Weller, 2009. "Credit Access, the Costs of Credit and Credit Market Discrimination," The Review of Black Political Economy, Springer, vol. 36(1), pages 7-28, March.
  3. Neil Bhutta, 2008. "Giving credit where credit is due? the Community Reinvestment Act and mortgage lending in lower-income neighborhoods," Finance and Economics Discussion Series 2008-61, Board of Governors of the Federal Reserve System (U.S.).
  4. Julia Sass Rubin, 2006. "Financing rural innovation with community development venture capital: models, options and obstacles," Community Development Investment Review, Federal Reserve Bank of San Francisco, pages 15-27.

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