Regulatory Incentives and Consolidation: The Case of Commercial Bank Mergers and the Community Reinvestment Act
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 provide evidence that banks self-regulate by strategically increasing their lending to these populations prior to acquiring another institution in anticipation of the regulatory and public scrutiny associated with a merger or acquisition. 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: (1) the effect cannot be explained by regulator behavior or by unobserved bank characteristics; (2) the relationship is observed for acquiring banks, which are the primary focus of scrutiny, but not for the banks that are being acquired; (3) the positive effect increases over the 1991 to 1995 time frame, a period when scrutiny of an institution’s community lending record increased; and (4) the effect is largest for big banks, who face particularly intense scrutiny.
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Volume (Year): 5 (2005)
Issue (Month): 1 (April)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.).
- Glenn B. 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.).
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