A Tradable Obligation Approach to the Community Reinvestment Act
Stanford Law School
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
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.
Number of Pages in PDF File: 25
Keywords: CRA, Community Reinvestment Act, Community Development
JEL Classification: G21
Date posted: May 23, 2009 ; Last revised: November 16, 2009