Strategically Staying Small: Regulatory Avoidance and the CRA

Abstract

Using the introduction of an asset-based two-tiered evaluation scheme in the 1995 CRA reform, we examine the consequences of regulatory avoidance. Banks respond by strategically bunching below the \$250M threshold. In a difference-in-differences design, we show that banks near the threshold prior to the reform reduce asset/loan growth, and increase loan rejection rates in low-to-moderate-income areas, a void unfilled by other banks. Regulatory avoidance produces real effects: areas with greater exposure to these banks experience a decline in small establishment shares and independent innovation. Our results highlight banks' willingness to incur costs to avoid regulations, negatively impacting CRA's beneficiaries.

Keywords: CRA, Financial Institutions, Regulatory Avoidance, Attribute-based Regulation

JEL Classification: G21, G28