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

45 Pages Posted: 7 Dec 2012 Last revised: 17 Dec 2012

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Efraim Benmelech

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Nittai Bergman

Tel Aviv University; National Bureau of Economic Research (NBER)

Amit Seru

Stanford University

Multiple version iconThere are 2 versions of this paper

Date Written: December 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.

Suggested Citation

Agarwal, Sumit and Benmelech, Efraim and Bergman, Nittai and Seru, Amit, Did the Community Reinvestment Act (Cra) Lead to Risky Lending? (December 2012). NBER Working Paper No. w18609. Available at SSRN: https://ssrn.com/abstract=2186337

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

Northwestern University - Kellogg School of Management ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nittai Bergman

Tel Aviv University

Ramat Aviv
Tel-Aviv, 6997801
Israel

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amit Seru

Stanford University ( email )

Stanford, CA 94305
United States

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