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Safety and Soundness and the CRA: Is There a Conflict?

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  • Jeffery W. Gunther

    (Federal Reserve Bank of Dallas, 2200 N. Pearl St., Dallas, TX 75201.)

Abstract

Ordered probit regressions of the supervisory ratings assigned to banks point to a conflict between the credit enhancement objectives associated with the Community Reinvestment Act (CRA) and financial safety and soundness standards. Aggressive banking strategies tend to help CRA ratings but hurt safety and soundness ratings. In addition, banks with financial problems are more likely to receive substandard CRA ratings, even though their condition may require a retrenchment from CRA objectives. Finally, there is some limited evidence to suggest that a greater focus on lending in low-income neighborhoods helps CRA ratings but at the expense of safety and soundness. Copyright 2002, Oxford University Press.

Suggested Citation

  • Jeffery W. Gunther, 2002. "Safety and Soundness and the CRA: Is There a Conflict?," Economic Inquiry, Western Economic Association International, vol. 40(3), pages 470-484, July.
    • Handle: RePEc:oup:ecinqu:v:40:y:2002:i:3:p:470-484
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    Cited by:

    1. Jo-Hui Chen & Chih-Sean Chen, 2011. "The effects of international off-site surveillance on bank rating changes," Quality & Quantity: International Journal of Methodology, Springer, vol. 45(6), pages 1313-1329, October.
    2. 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.
    3. David Ely & Kenneth Robinson, 2003. "Is the Community Reinvestment Act in Need of Further Reform? Evidence from Equity Markets during the 1995 Reform Process," Journal of Financial Services Research, Springer;Western Finance Association, vol. 23(1), pages 59-78, February.

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