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

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

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18609.

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Date of creation: Dec 2012
Date of revision:
Handle: RePEc:nbr:nberwo:18609
Note: AP CF
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Chevalier, J. & Ellison, G., 1996. "Risk Taking by Mutual Funds as a Response to Incentives," Working papers 96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
  3. Itzhak Ben-David, 2011. "Financial Constraints and Inflated Home Prices during the Real Estate Boom," American Economic Journal: Applied Economics, American Economic Association, vol. 3(3), pages 55-87, July.
  4. Charles W. Calomiris, 2011. "An Incentive‐Robust Programme For Financial Reform," Manchester School, University of Manchester, vol. 79(s2), pages 39-72, 09.
  5. Rubén Hernández-Murillo & Andra C. Ghent & Michael T. Owyang, 2012. "Did affordable housing legislation contribute to the subprime securities boom?," Working Papers 2012-005, Federal Reserve Bank of St. Louis.
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