Board Diversity Matters: An Empirical Assessment of Community Reinvestment at Federal Reserve-Regulated Banks
50 Pages Posted: 5 Jan 2022 Last revised: 11 Apr 2023
Date Written: January 01, 2024
Abstract
This manuscript examines whether racial diversity among the leadership of a key banking regulator-which is responsible for evaluating many banks' engagement in underserved, often majority-minority communities-is associated with regulated banks' greater involvement in these communities. To assess this relationship, we leverage original data on the demographic characteristics of the boards of directors of the twelve regional Federal Reserve Banks and exploit two unusual features of the U.S. financial regulatory system. First, that some Federal Reserve Districts bifurcate states allows for comparisons of the activities of 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 Reserve Bank supervisors. Second, that Reserve Banks evaluate some commercial banks' community-reinvestment activities and other federal regulators evaluate these activities at other commercial banks within the same geographic region presents another comparison group. Empirical analyses based on both identification strategies reveal that racial diversity on Reserve Bank boards is associated with Federal Reserve-regulated banks' increased community-reinvestment activities in underserved, often majority-minority areas. That diversity can be consequential-even where, as here, the connection between the organization's leadership and policy outcomes is attenuated-encourages greater scholarly attention to the influence of leadership 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: Suggested Citation