Does Competition Reduce Racial Discrimination in Lending?
45 Pages Posted: 12 Apr 2017 Last revised: 13 Apr 2017
Date Written: April 25, 2016
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: Suggested Citation