Strategically Staying Small: Regulatory Avoidance and the CRA

60 Pages Posted: 8 Jul 2021 Last revised: 26 Oct 2021

See all articles by Jacelly Cespedes

Jacelly Cespedes

University of Minnesota - Carlson School of Management

Jordan Nickerson

MIT - Sloan

Carlos Parra

Pontifical Catholic University of Chile - School of Business

Date Written: June 21, 2021

Abstract

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

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

MIT - Sloan ( email )

100 Main Street
Cambridge, MA 02142
United States

Carlos Parra

Pontifical Catholic University of Chile - School of Business ( email )

Vicuna Mackenna 4860
Santiago
Chile

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

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