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ABSTRACT
This article examines the relationship between the Community Reinvestment Act (CRA) and bank branching patterns, measured by the risk of branch closure and the net loss of branches at the neighborhood level, in the aftermath of the Great Recession. Between 2009 and 2017, there was a larger decline in the number of bank branches in lower income neighborhoods than in more affluent ones, raising concerns about access to mainstream financial services. Once we control for supply and demand factors that influence bank branching decisions, we find evidence that the CRA is associated with a lower risk of branch closure, and that the effects are stronger for neighborhoods with fewer branches, for larger banks, and for major metropolitan areas. The CRA also reduces the risk of net bank losses in lower income neighborhoods. The evidence from our analysis is consistent with the notion that the CRA helps banks meet the credit needs of underserved communities and populations by ensuring the continued presence of brick-and-mortar branches.
Acknowledgments
The authors thank Anna E. Tranfaglia for her excellent research support. The views expressed in this article are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
Disclosure Statement
No potential conflict of interest was reported by the authors.
Notes
1. Assessment areas are officially defined as one or more [metropolitan statistical areas] … or one or more contiguous political subdivisions, such as counties, cities, or towns that include the census tracts in which the bank has its main office, its branches, and its deposit-taking ATMs, as well as the surrounding [census tracts] in which the bank has originated or purchased a substantial portion of its loans. For more information on how assessment areas are defined, see https://consumercomplianceoutlook.org/2014/first-quarter/understanding-cras-assessment-area-requirements.
2. The CRA is facing major reform, and proposals to use banks’ market presence, in addition to their physical presence, to determine their assessment areas are under consideration (Office of the Comptroller of the Currency, Citation2018).
3. According to SNL, the SOD data have been cleaned and verified in several ways: (a) SNL created a unique identifier for each individual branch that can be used to track the same branch over time; (b) SNL investigated and updated missing, incomplete, or erroneous addresses and regeocoded the location of all branches; and (c) SNL validated and updated the branch openings, closings, and merger and acquisition activities. As a result, there were generally no observation gaps and only a few hundred duplicates, and we used our judgment to keep the unique records only in our final sample.
4. The SNL SOD data provide branch closing and opening dates for most but not all branches. Thus, relying on these closing or opening dates may miss a small number of branches.
5. We use the term CRA-eligible tract as shorthand only to mean that the tract is an LMI tract. This does not necessarily mean that none of the lending to a CRA-ineligible neighborhood qualifies for CRA credit. For example, lending to LMI borrowers in middle- or upper-income neighborhoods is eligible for CRA credit, and revitalization or stabilization activities in distressed or underserved nonmetropolitan middle-income geographies are eligible to receive CRA consideration under the community development definition.
6. The FFIEC estimates AMFIs for MSAs, MDs, and nonmetropolitan portions of each state.
7. Because the LMI status of a tract is a relative measure compared with the larger area, the CRA eligibility of a tract can also change if the AMFI changes. The Office of Management and Budget (OMB) published a new set of MSA/MD definitions in 2013 as part of its comprehensive review of statistical area standards and definitions after the 2010 census, which had a significant impact on the CRA eligibility of tracts (Ding et al., Citation2018). See more details at www.ffiec.gov/cra/OMB_MSA.htm
9. We also measured bank size by the level of assets of their institution; the results are quite consistent. Lenders are classified as intermediate small institutions, small institutions, or large institutions, which are subject to different levels of CRA examinations.
10. These three outcomes are interdependent, since the net loss is equal to the number of closures minus the number of new openings in the same year.
11. Note that if a bank closes a branch but then moves it across the street, it would still be coded as a closed branch (and a new opening).
12. There are various definitions of rural areas; here, we consider nonmetro areas to be rural areas and use these terms interchangeably.
13. This trend is generally consistent with Bostic and Lee’s (Citation2017) finding of an insignificant impact of the CRA in the small business market during the pre-2012 period and a generally positive effect in the post-2012 period.
Additional information
Notes on contributors
Lei Ding
Lei Ding is Senior Community Development Economic Advisor at the Community Development and Regional Outreach department of the Federal Reserve Bank of Philadelphia. His areas of interest and expertise include mortgage finance, neighborhood change, community and economic development, and housing policy.
Carolina K. Reid
Carolina K. Reid is an associate professor in the Department of City and Regional Planning at University of California Berkeley, and the Faculty Research Advisor for the Terner Center for Housing Innovation.