Bank Supervision and Organizational Capital: The Case of Minority Lending

69 Pages Posted: 20 Apr 2021 Last revised: 22 Sep 2023

See all articles by Byeongchan An

Byeongchan An

University of Utah, David Eccles School of Business, Students

Anya Kleymenova

Board of Governors of the Federal Reserve System

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Rimmy E. Tomy

University of Chicago

Multiple version iconThere are 3 versions of this paper

Date Written: September 21, 2023

Abstract

Racial disparities in mortgage lending have important welfare implications. We investigate whether improvements in banks’ organizational capital and associated control systems facilitate increased loan origination to minority borrowers. We focus on bank supervisors’ enforcement decisions and orders (EDOs) against banks, which can enforce changes in banks’ internal processes, procedures, and management practices. We hypothesize that EDO-imposed improvements in loan policies, internal governance, and employee training mitigate deficiencies in credit assessments and lending decisions that previously disadvantaged minority borrowers. We find that relative to white borrowers, mortgage origination to minority borrowers significantly increases following the resolution of EDOs, where this positive effect increases with the strictness of bank supervisors and the severity of the EDO. Using a semi-supervised machine learning method to analyze and quantify the text of EDOs, we find that increases in minority loan origination are significantly higher for EDOs specifying revisions of loan policies, implementation of formal internal governance procedures, or more employee training, especially in areas with a high proportion of subprime borrowers. Overall, we find that EDO-driven improvements in organizational capital generate unintended, positive social externalities that enhance access to credit for minority borrowers.

Keywords: Banking, Bank supervision, Discrimination, Enforcement actions, Internal controls, Internal audit, Loan policy, Mortgage lending

JEL Classification: G21, G28, G38

Suggested Citation

An, Byeongchan and Kleymenova, Anya V. and Bushman, Robert M. and Tomy, Rimmy, Bank Supervision and Organizational Capital: The Case of Minority Lending (September 21, 2023). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, Kenan Institute of Private Enterprise Research Paper No. 3825119, Chicago Booth Research Paper No. 21-12, Fama-Miller Working Paper, Available at SSRN: https://ssrn.com/abstract=3825119 or http://dx.doi.org/10.2139/ssrn.3825119

Byeongchan An

University of Utah, David Eccles School of Business, Students ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Anya V. Kleymenova

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2662 (Phone)

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

Rimmy Tomy (Contact Author)

University of Chicago ( email )

Booth School of Business
5807 S Woodlawn Ave
Chicago, IL 60637
United States

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