Regulatory Incentives and Consolidation: The Case of Commercial Bank Mergers and the Community Reinvestment Act

28 Pages Posted: 13 Jun 2002

See all articles by Raphael W. Bostic

Raphael W. Bostic

Federal Reserve Bank of Atlanta

Hamid Mehran

Independent

Anna L. Paulson

Federal Reserve Bank of Chicago

Marc R. Saidenberg

affiliation not provided to SSRN

Date Written: May 21, 2002

Abstract

Bank regulators are required to consider a bank's record of providing credit to low- and moderate-income neighborhoods and individuals in approving bank applications for mergers and acquisitions. We test the hypothesis that banks strategically prepare for the regulatory and public scrutiny associated with a merger or acquisition by increasing their lending to low- and moderate-income individuals in anticipation of acquiring another institution. We find evidence in favor of this hypothesis. In particular, we show that the higher the percentage of the institution's mortgage originations in a given year that are directed to low- and moderate-income individuals or neighborhoods, the greater the probability that the institution will acquire another bank in the following year. Further investigation bolsters the view that this correlation is due to banks' anticipation of the public and regulatory scrutiny during the merger review process. The effect cannot be explained by other bank characteristics. The relationship is observed for acquiring banks, which are the focus of public and regulatory scrutiny, but not for the banks that are being acquired. In addition, the positive effect of lending to low- and moderate-income individuals and neighborhoods on the likelihood that a bank will acquire another bank increases over the 1991 - 1995 time frame, a period when public and regulatory scrutiny of an institution's community lending record increased. The effect of lending to low- and moderate-income individuals and neighborhoods is also largest for big banks, who face particularly intense public and regulatory scrutiny.

JEL Classification: G21, G28, G34, G38, R21

Suggested Citation

Bostic, Raphael W. and Mehran, Hamid and Paulson, Anna L. and Saidenberg, Marc R., Regulatory Incentives and Consolidation: The Case of Commercial Bank Mergers and the Community Reinvestment Act (May 21, 2002). FRB of Chicago Working Paper No. WP-2002-06. Available at SSRN: https://ssrn.com/abstract=315027 or http://dx.doi.org/10.2139/ssrn.315027

Raphael W. Bostic

Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Hamid Mehran

Independent ( email )

No Address Available
United States

Anna L. Paulson (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312 322 2169 (Phone)

Marc R. Saidenberg

affiliation not provided to SSRN

No Address Available

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