Strategically Staying Small: Regulatory Avoidance and the CRA

59 Pages Posted: 8 Jul 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 27, 2021

Abstract

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: G21, G28

JEL Classification: CRA, Financial Institutions, Regulatory Avoidance, Attribute-based Regulation.

Suggested Citation

Cespedes, Jacelly and Nickerson, Jordan and Parra, Carlos, Strategically Staying Small: Regulatory Avoidance and the CRA (June 27, 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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