Does Competition Reduce Racial Discrimination in Lending?

45 Pages Posted: 12 Apr 2017 Last revised: 13 Apr 2017

See all articles by Greg Buchak

Greg Buchak

University of Chicago

Adam Jørring

Boston College - Carroll School of Management

Date Written: April 25, 2016

Abstract

This paper examines whether increases in bank competition reduce discriminatory practices in mortgage lending. Lenders are significantly less likely to approve black applicants' loan applications despite facing similar credit risk. However, following the relaxation of interstate bank branching laws in the 1990s, increases in local lending competition reduced the approval differential between potential white and black borrowers by roughly one quarter. The reduction was driven both by incumbent lenders altering lending policies to avoid losing market share and by the entry of new banks. The results suggest strong complementaries between direct regulation and the competition mechanism. In particular, direct regulation is effective against large lenders where statistical proof problems are less severe, while competition provides incentives to smaller, harder to regulate lenders.

Keywords: Mortgage, Discrimination, Competition

JEL Classification: G21, K22, L51

Suggested Citation

Buchak, Greg and Jørring, Adam, Does Competition Reduce Racial Discrimination in Lending? (April 25, 2016). Available at SSRN: https://ssrn.com/abstract=2951843 or http://dx.doi.org/10.2139/ssrn.2951843

Greg Buchak (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Adam Jørring

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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