Strategically Staying Small: Regulatory Avoidance and the CRA
66 Pages Posted: 8 Jul 2021 Last revised: 23 Mar 2022
Date Written: June 21, 2021
Using the introduction of an asset based two-tiered evaluation scheme in the 1995 CRA reform, we examine the consequences of regulatory avoidance. Banks exploit the attribute-based regulation by strategically slowing asset growth, bunching below the \$250M threshold. The regulatory avoidance also produces real effects. Banks near the threshold experience an increase in the rejection rate of LMI loans, while areas they serve experience a decline in county-level small establishment shares and independent innovation. These results highlight a bank’s willingness to take costly actions to avoid regulatory oversight and subsequent credit reduction for individuals whom the CRA is designed to benefit.
Keywords: CRA, Financial Institutions, Regulatory Avoidance, Attribute-based Regulation
JEL Classification: G21, G28
Suggested Citation: Suggested Citation