Strategically Staying Small: Regulatory Avoidance and the CRA
60 Pages Posted: 8 Jul 2021 Last revised: 26 Oct 2021
Date Written: June 21, 2021
The 1995 CRA reform led to a two-tiered evaluation scheme determined by a bank's asset value. Using this feature, we examine the consequences of regulatory avoidance in the context of the CRA. Banks exploit the attribute-based regulation by strategically slowing asset growth, bunching below the $250M threshold. Exploiting the introduction of the asset threshold, we find that regulatory avoidance also has real effects. Banks near the threshold prior to the 1995 reform experience an increase in the rejection rate of LMI loans, while areas they serve experience a decline in the county-level share of small establishments and independent innovation. Taken together, these results highlight a bank’s willingness to take costly actions to avoid increased regulatory oversight, and as a consequence, reduced credit access for individuals the CRA is designed to benefit.
Keywords: CRA, Financial Institutions, Regulatory Avoidance, Attribute-based Regulation
JEL Classification: G21, G28
Suggested Citation: Suggested Citation