Abstract

http://ssrn.com/abstract=2172549
 
 

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


Sumit Agarwal


National University of Singapore

Effi Benmelech


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Nittai Bergman


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Amit Seru


University of Chicago - Booth School of Business

October 1, 2012


Abstract:     
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.

Number of Pages in PDF File: 44

Keywords: CRA, Financial Institutions, Mortgages, Financial Crisis, Household Finance

JEL Classification: G21, G28

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Date posted: November 8, 2012 ; Last revised: November 18, 2012

Suggested Citation

Agarwal, Sumit and Benmelech, Effi and Bergman, Nittai and Seru, Amit, Did the Community Reinvestment Act (CRA) Lead to Risky Lending? (October 1, 2012). Available at SSRN: http://ssrn.com/abstract=2172549 or http://dx.doi.org/10.2139/ssrn.2172549

Contact Information

Sumit Agarwal (Contact Author)
National University of Singapore ( email )
15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)
HOME PAGE: http://www.ushakrisna.com
Efraim Benmelech
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
617-496-4787 (Phone)
617-495-8570 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Nittai Bergman
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
50 Memorial Drive
Cambridge, MA 02142
United States
617-253-2933 (Phone)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Amit Seru
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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References:  28
Citations:  3
Footnotes:  25

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