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A Tradable Obligation Approach to the Community Reinvestment Act

Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act, Federal Reserve Banks of Boston and San Francisco, February 2009

Stanford Law and Economics Olin Working Paper No. 375

25 Pages Posted: 23 May 2009 Last revised: 16 Nov 2009

Michael Klausner

Stanford Law School

Date Written: May 19, 2009

Abstract

This chapter revisits a proposal I made fifteen years ago to redesign CRA in a way that harnesses market forces. Specifically, I proposed that banks be permitted to trade their CRA obligations with one another in a manner analogous to 'cap and trade' regimes used to address environmental pollution. A tradable obligation approach to CRA has the potential to enhance the provision of financial services to low- and moderate-income communities. The potential advantages stem from three sources: The allocation of CRA obligations to banks best able to fulfill them; the promotion of specialization in serving CRA-qualified communities; and increased concentration of lenders in CRA-qualified communities. Specialization and concentration could promote cost efficiencies, the amelioration of information-based market imperfections, and the internalization of externalities associated with CRA-qualified services.

Changes in the financial services sector and in community development institutions make this approach potentially more attractive today than it was when I first proposed it. Banks’ lending outside the areas in which they are physically located has expanded substantially; other types of financial institutions not currently subject to CRA now make a high volume of home mortgage loans; and community development financial institutions have developed that could facilitate the allocation of services to CRA-qualified communities.

Keywords: CRA, Community Reinvestment Act, Community Development

JEL Classification: G21

Suggested Citation

Klausner, Michael, A Tradable Obligation Approach to the Community Reinvestment Act (May 19, 2009). Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act, Federal Reserve Banks of Boston and San Francisco, February 2009; Stanford Law and Economics Olin Working Paper No. 375. Available at SSRN: https://ssrn.com/abstract=1407290

Michael D. Klausner (Contact Author)

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-6433 (Phone)
650-725-0253 (Fax)

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