Strategically Staying Small: Regulatory Avoidance and the Community Reinvestment Act

Banks operate in one of the nation’s most heavily regulated industries, where policy intervention aims for wide-ranging goals that include limiting risk, protecting consumers, and ensuring fair treatment of individuals through equal access to credit. The Community Reinvestment Act (CRA), enacted in 1977, is a much-studied example, though unlike most banking regulations, which restrict banks, the CRA encourages them to extend credit to targeted groups within certain communities. Though a number of studies (e.g., Agarwal, Benmelech, Bergman, and Seru (2012), Saadi (2020)) have examined whether the CRA encourages risky lending, our new paper looks at a different potential consequence of … Read more