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Did the Community Reinvestment Act (CRA) Lead to Risky Lending?

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Listed:
  • Sumit Agarwal
  • Efraim Benmelech
  • Nittai Bergman
  • Amit Seru

Abstract

Yes, it did. We use exogenous variation in banks' incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

Suggested Citation

  • Sumit Agarwal & Efraim Benmelech & Nittai Bergman & Amit Seru, 2012. "Did the Community Reinvestment Act (CRA) Lead to Risky Lending?," NBER Working Papers 18609, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:18609
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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