Strategically Staying Small: Regulatory Avoidance and the CRA

66 Pages Posted: 8 Jul 2021 Last revised: 23 Mar 2022

See all articles by Jacelly Cespedes

Jacelly Cespedes

University of Minnesota - Carlson School of Management

Jordan Nickerson

University of Washington - Department of Finance and Business Economics

Carlos Parra

Pontificia Universidad Católica de Chile - School of Business

Date Written: June 21, 2021

Abstract

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

Cespedes, Jacelly and Nickerson, Jordan and Parra, Carlos, Strategically Staying Small: Regulatory Avoidance and the CRA (June 21, 2021). Available at SSRN: https://ssrn.com/abstract=3874987 or http://dx.doi.org/10.2139/ssrn.3874987

Jacelly Cespedes (Contact Author)

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://sites.google.com/site/jacellycespedes/

Jordan Nickerson

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
Seattle, WA 98195
United States

Carlos Parra

Pontificia Universidad Católica de Chile - School of Business ( email )

Vicuna Mackenna 4860
Santiago
Chile

HOME PAGE: http://www.carlosrparra.com/

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