Strategically Staying Small: Regulatory Avoidance and the CRA
59 Pages Posted: 8 Jul 2021 Last revised: 18 Oct 2021
Date Written: June 27, 2021
The 1995 CRA reform led to a two-tiered evaluation scheme determined by a bank's asset value. Using this feature, we estimate the cost of the CRA through the lens of costly actions taken by banks. Banks exploit the attribute-based regulation by strategically slowing asset growth, bunching below a $250M threshold. This regulatory avoidance also has real effects. Treated banks 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 entrepreneurial 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