So, the Community Reinvestment Act Incented Risky Lending Afterall

From the Digest of a recent study by the Bureau of Economic Research:


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

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.

The full study may be downloaded/purchased here.

What is certain about all of this is that the partisan divide in our politics will never allow real solutions.  We will remain hogtied with banks that are too big to fail, decreasing competitiveness in the finance sector due to contrived regulation, delusional faith in government solutions to problems with millions of variables, and oversimplification of the problems that people fear…


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