Board Diversity Matters: An Empirical Assessment of Community Lending at Federal Reserve-Regulated Banks

32 Pages Posted: 5 Jan 2022 Last revised: 3 Mar 2022

See all articles by Brian D. Feinstein

Brian D. Feinstein

University of Pennsylvania - The Wharton School

Peter Conti-Brown

University of Pennsylvania - The Wharton School; Brookings Institution

Kaleb Nygaard

Yale University - Yale Program on Financial Stability

Date Written: 2022

Abstract

This working paper shows that the increased presence of minority directors on the twelve regional Federal Reserve Banks — the quasi-governmental entities responsible for evaluating many commercial banks’ lending to underserved communities — is associated with greater lending to these communities. To assess this relationship, we leverage original data on the demographic characteristics of Reserve Bank boards of directors and exploit three unusual features of the U.S. financial regulatory system. First, that some Reserve Districts bifurcate states allows for comparisons of lending postures for commercial banks subject to identical state banking regulations — and, for geographically proximate banks on either side of the line, substantially similar economic conditions — but different Federal Reserve Bank supervisors. Second, that Federal Reserve Banks evaluate some commercial banks’ community lending and other federal regulators evaluate this activity at other commercial banks within the same geographic region presents another comparison group. Third, a 2010 statutory change that reduced some directors’ roles in Reserve Bank governance enables analysis of the extent to which director diversity is correlated with community lending before and after this legal change that presumably tempered some directors’ power over regulated commercial banks but left other directors’ authority unaffected.

Empirical analyses based on all three identification strategies show consistent evidence that racial diversity on Reserve Bank boards is associated with Fed-regulated banks’ increased lending to underserved groups. That diversity can be consequential even where, as with the Fed, the connection between the organization’s leadership and policy outcomes is attenuated encourages greater scholarly attention to the influence of diversity on outcomes in other public- and private-sector contexts.

Keywords: Federal Reserve, Community Reinvestment Act, corporate board diversity, mortgage lending, banking, financial institutions

JEL Classification: H11, E58, G18, G21, G28, K23

Suggested Citation

Feinstein, Brian D. and Conti-Brown, Peter and Nygaard, Kaleb, Board Diversity Matters: An Empirical Assessment of Community Lending at Federal Reserve-Regulated Banks (2022). The Wharton School Research Paper Forthcoming, Yale Program on Financial Stability Working Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4000110 or http://dx.doi.org/10.2139/ssrn.4000110

Brian D. Feinstein (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Peter Conti-Brown

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Kaleb Nygaard

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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