IDEAS home Printed from https://ideas.repec.org/p/fip/fedhwp/wp-02-06.html
   My bibliography  Save this paper

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

Author

Listed:

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

Suggested Citation

  • Raphael W. Bostic & Hamid Mehran & Anna L. Paulson & Marc R. Saidenberg, 2002. "Regulatory incentives and consolidation: the case of commercial bank mergers and the Community Reinvestment Act," Working Paper Series WP-02-06, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-02-06
    as

    Download full text from publisher

    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/2002/WP2002-06.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Glenn B. Canner & Wayne Passmore, "undated". "The Community Reinvestment Act and the Profitability of Mortgage-Oriented Banks," Finance and Economics Discussion Series 1997-07, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    2. 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.
    3. 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.), vol. 84(Sep), pages 703-715, September.
    4. 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.
    5. Douglas D. Evanoff & Lewis M. Segal, 1996. "CRA and fair lending regulations: resulting trends in mortgage lending," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 20(Nov), pages 19-46.
    6. 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.), vol. 85(Feb), pages 81-102, February.
    7. Robert B. Avery & Patricia E. Beeson & Mark S. Sniderman, 1997. "Information dynamics and CRA strategy," Economic Commentary, Federal Reserve Bank of Cleveland, issue Feb.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lee, Hyojung & Bostic, Raphael W., 2020. "Bank adaptation to neighborhood change: Mortgage lending and the Community Reinvestment Act," Journal of Urban Economics, Elsevier, vol. 116(C).
    2. Christian Weller, 2009. "Credit Access, the Costs of Credit and Credit Market Discrimination," The Review of Black Political Economy, Springer;National Economic Association, vol. 36(1), pages 7-28, March.
    3. Julia Sass Rubin, 2009. "Shifting ground: Can community development loan funds continue to serve the neediest borrowers?," Community Development Working Paper 2009-01, Federal Reserve Bank of San Francisco.
    4. Julia Sass Rubin, 2006. "Financing rural innovation with community development venture capital: models, options and obstacles," Community Development Innovation Review, Federal Reserve Bank of San Francisco, issue 3, pages 15-27.
    5. John Fitzgerald & Samuel P. Vitello, 2014. "Impacts of the Community Reinvestment Act on Neighborhood Change and Gentrification," Housing Policy Debate, Taylor & Francis Journals, vol. 24(2), pages 446-466, April.
    6. Neil Bhutta, 2011. "The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods," Journal of Law and Economics, University of Chicago Press, vol. 54(4), pages 953-983.
    7. 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.).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. AKM Rezaul Hossain, 2004. "The Past, Present and Future of Community Reinvestment Act (CRA): A Historical Perspective," Working papers 2004-30, University of Connecticut, Department of Economics.
    2. Drew Dahl & Douglas D. Evanoff & Michael F. Spivey, 2002. "Community Reinvestment Act Enforcement and Changes in Targeted Lending," International Regional Science Review, , vol. 25(3), pages 307-322, July.
    3. Bostic, Raphael W. & Robinson, Breck L., 2004. "The impact of CRA agreements on community banks," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3069-3095, December.
    4. Susan White HAAG, 2002. "Community Reinvestment: A Review of Urban Outcomes and Challenges," International Regional Science Review, , vol. 25(3), pages 252-275, July.
    5. Raphael Bostic, 2002. "Do CRA Agreements Influence Lending Patterns?," Working Paper 8623, USC Lusk Center for Real Estate.
    6. Drew Dahl & Douglas Evanoff & Michael Spivey, 2003. "The Timing and Persistence of CRA Compliance Ratings," Journal of Financial Services Research, Springer;Western Finance Association, vol. 23(2), pages 113-132, April.
    7. Elizabeth Laderman & Carolina Reid, 2008. "Lending in low- and moderate-income neighborhoods in California: the performance of CRA lending during the subprime meltdown," Community Development Working Paper 2008-05, Federal Reserve Bank of San Francisco.
    8. Robert B. Avery & Patricia E. Beeson & Mark S. Sniderman, 1996. "Neighborhood information and home mortgage lending," Working Papers (Old Series) 9620, Federal Reserve Bank of Cleveland.
    9. Westley, Glenn D. & Shaffer, Sherrill, 1999. "Credit union policies and performance in Latin America," Journal of Banking & Finance, Elsevier, vol. 23(9), pages 1303-1329, September.
    10. Gabriel, Stuart A. & Rosenthal, Stuart S., 2005. "Homeownership in the 1980s and 1990s: aggregate trends and racial gaps," Journal of Urban Economics, Elsevier, vol. 57(1), pages 101-127, January.
    11. Harrison, David M., 2001. "The Importance of Lender Heterogeneity in Mortgage Lending," Journal of Urban Economics, Elsevier, vol. 49(2), pages 285-309, March.
    12. Bostic, Raphael W & Surette, Brian J, 2001. "Have the Doors Opened Wider? Trends in Homeownership Rates by Race and Income," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 411-434, November.
    13. Robert Avery & Katherine Samolyk, 2004. "Bank Consolidation and Small Business Lending: The Role of Community Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 25(2), pages 291-325, April.
    14. Ralph C. Kimball, 1997. "Specialization, risk, and capital in banking," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 51-73.
    15. Avery, Robert B. & Beeson, Patricia E. & Sniderman, Mark S., 1999. "Neighborhood Information and Home Mortgage Lending," Journal of Urban Economics, Elsevier, vol. 45(2), pages 287-310, March.
    16. Robert B. Avery & Patricia E. Beeson & Mark S. Sniderman, 1993. "Home mortgage lending by the numbers," Economic Commentary, Federal Reserve Bank of Cleveland, issue Feb.
    17. Kenneth Temkin & Roberto Quercia & George Galster, 2000. "The impact of secondary mortgage market guidelines on affordable and fair lending: A reconnaissance from the front lines," The Review of Black Political Economy, Springer;National Economic Association, vol. 28(2), pages 29-52, December.
    18. Wendy Edelberg, 2004. "Risk-based Pricing of Interest Rates in Household Loan Markets," 2004 Meeting Papers 442, Society for Economic Dynamics.
    19. Judith Robinson, 2002. "Race, Gender, and Familial Status: Discrimination in One US Mortgage Lending Market," Feminist Economics, Taylor & Francis Journals, vol. 8(2), pages 63-85.
    20. Robert B. Avery & Patricia E. Beeson & Mark S. Sniderman, 1992. "Cross-lender variation in home mortgage lending," Working Papers (Old Series) 9219, Federal Reserve Bank of Cleveland.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedhwp:wp-02-06. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lauren Wiese (email available below). General contact details of provider: https://edirc.repec.org/data/frbchus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.