What Can Price Theory Say About the Community Reinvestment Act?

27 Pages Posted: 2 Dec 2012

See all articles by Robert Lacy

Robert Lacy

Federal Reserve Banks - Federal Reserve Bank of Richmond

John R. Walter

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: 2002

Abstract

In 1977, Congress passed the Community Reinvestment Act (CRA) to encourage expanded lending and investment in lower income communities. In accordance with the Act, federal bank regulators periodically evaluate banks’ lending performance in such communities, providing both carrot and stick to encourage banks to expand lending there. Our analytical model demonstrates that CRA low-income lending requirements have cost consequences for middle- to high-income lending and that such requirements may have distorted credit allocation. Our model also indicates that there are limits on regulators’ ability to induce further expansion of low-income lending in today’s competitive banking environment.

Suggested Citation

Lacy, Robert and Walter, John R., What Can Price Theory Say About the Community Reinvestment Act? (2002). FRB Richmond Economic Quarterly, vol. 88, no. 2, Spring 2002, pp. 1-27, Available at SSRN: https://ssrn.com/abstract=2183329

Robert Lacy

Federal Reserve Banks - Federal Reserve Bank of Richmond

P.O. Box 27622
Richmond, VA 23261
United States

John R. Walter (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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