Out of the Goodness of Their Hearts? Regulatory and Regional Impacts on Bank Investment in Housing and Community Development in the United States

ABSTRACT:

Banks are considered key actors in affordable housing and community development in the United States. Their involvement in such activities may be due partly to their dependence on economic rents generated from development. In the United States, however, banks are encouraged to support such activities by the federal 1977 Community Reinvestment Act (CRA). I examine how different factors explain the CRA-qualified investments by banks. Qualified investments are essentially nondebt financial resources provided as an equity investment or grant with a community development purpose. I find that the identity of the regulator (the United States has four banking regulators) has a major impact on the level of qualified investments. Other things equal, a difference in regulators can cause a bank’s qualified investments to more than double. Besides suggesting that some regulators may be enforcing a major portion of CRA regulations more vigorously than others, this also suggests that the CRA plays a major role in bank investment in community development. This has policy implications not just in the United States but also in other countries that might consider replicating the CRA.

Notes

1 This study only covers banks with more than $1 billion in assets, and so recent changes to CRA regulations that change the evaluation procedures for “intermediate” banks (those between $250 million and $1 billion in assets) are not relevant here. Moreover, the examinations in this study predate these regulatory changes.