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Federal banking regulators' competition in laxity: Evidence from CRA audits

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  • Ann Matasar
  • Deborah Pavelka

Abstract

The U.S. banking industry has three federal regulators in addition to the 50 state regulators. Through choices regarding its chartering source, joining the Federal Reserve System, and having deposit insurance, a bank also selects which office or agency serves as its primary regulator. Federal regulators gain status and authority from the number of banks over which they have primary supervision. It has long been suspected, therefore, that they compete with each other to entice banks to make choices that increase the number of banks reporting to them. This competition which includes less stringent enforcement and broad interpretation of the laws as favored by the banks is known as competition in laxity. The Community Reinvestment Act (CRA) is enforced by each of the three federal banking regulators. Since 1990, their ratings of banks' CRA performance have been published. This published data provides an opportunity to test accuracy of the competition in laxity theory. Copyright International Atlantic Economic Society 1998

Suggested Citation

  • Ann Matasar & Deborah Pavelka, 1998. "Federal banking regulators' competition in laxity: Evidence from CRA audits," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 4(1), pages 56-69, February.
    • Handle: RePEc:kap:iaecre:v:4:y:1998:i:1:p:56-69:10.1007/bf02295236
    DOI: 10.1007/BF02295236
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    1. Glenn B. Canner & Joe M. Cleaver, 1980. "The Community Reinvestment Act: a progress report," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 87-96.
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    Cited by:

    1. Nicoletti, Allison, 2018. "The effects of bank regulators and external auditors on loan loss provisions," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 244-265.

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