The use of CRA ratings in regulators' deliberations on bank mergers creates incentives for inefficient lending and distracts attention from more important factors for consumer welfare, such as local bank competition.
Branch banking in that state not only made the banks that operated branches more stable; it also made the unit banks in competition with branch banks more stable than unit banks in places without branch banks, suggesting that competitive pressure provided a healthy check on inefficient unit bank practices.
In a 2007 report, for example, the National Community Reinvestment Coalition touted "Higher debt-to-equity ratios than conventional loans," "Flexible underwriting standards," "Low or no down payment[s]," "Commitments by secondary market institutions to purchase loans," and "Second review" of denied applications as consequences of the CRA. Raising loan-to-value ratios, relaxing borrower standards, and pushing secondary market institutions to buy more bank loans all make lending riskier.
In the absence of the CRA, and assuming for simplicity that all prospective borrowers face a similar interest rate, the bank would pick the projects with the highest likelihood of repayment; that is, Projects A, B, and C. Under the CRA if the bank believes that its loan to Project B will not suffice to get the bank a high CRA rating, it may choose Project D over Project C because the loan applicant in D qualifies for LMI status, whereas the applicant in C does not.
While this is lower than the share of bank costs related to the Bank Secrecy and Truth in Lending Acts, it is still significant, especially considering that overall bank compliance costs have increased in recent years.
Groups such as the National Community Reinvestment Coalition have explicitly linked periodic waves of bank mergers to increases in those banks' commitments to lend, suggesting that the merger would not have taken place without the banks' lending promises.
Such an extension would not be possible under the present CRA evaluation framework, which defines eligible assessment areas as those where institutions have offices, branches, or ATMs. Moreover, the rationale for mandating community reinvestment by banks - that they enjoy government deposit insurance - fails to apply to fintech and other nonbank lenders.
https://www.cato.org/publications/policy-analysis/community-reinvestment-act-age-fintech-bank-competition
Branch banking in that state not only made the banks that operated branches more stable; it also made the unit banks in competition with branch banks more stable than unit banks in places without branch banks, suggesting that competitive pressure provided a healthy check on inefficient unit bank practices.
In a 2007 report, for example, the National Community Reinvestment Coalition touted "Higher debt-to-equity ratios than conventional loans," "Flexible underwriting standards," "Low or no down payment[s]," "Commitments by secondary market institutions to purchase loans," and "Second review" of denied applications as consequences of the CRA. Raising loan-to-value ratios, relaxing borrower standards, and pushing secondary market institutions to buy more bank loans all make lending riskier.
In the absence of the CRA, and assuming for simplicity that all prospective borrowers face a similar interest rate, the bank would pick the projects with the highest likelihood of repayment; that is, Projects A, B, and C. Under the CRA if the bank believes that its loan to Project B will not suffice to get the bank a high CRA rating, it may choose Project D over Project C because the loan applicant in D qualifies for LMI status, whereas the applicant in C does not.
While this is lower than the share of bank costs related to the Bank Secrecy and Truth in Lending Acts, it is still significant, especially considering that overall bank compliance costs have increased in recent years.
Groups such as the National Community Reinvestment Coalition have explicitly linked periodic waves of bank mergers to increases in those banks' commitments to lend, suggesting that the merger would not have taken place without the banks' lending promises.
Such an extension would not be possible under the present CRA evaluation framework, which defines eligible assessment areas as those where institutions have offices, branches, or ATMs. Moreover, the rationale for mandating community reinvestment by banks - that they enjoy government deposit insurance - fails to apply to fintech and other nonbank lenders.
https://www.cato.org/publications/policy-analysis/community-reinvestment-act-age-fintech-bank-competition
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