New study concludes that the Community Reinvestment Act ‘clearly’ did lead to risky lending

[Valin]

AEIdeas:

James Pethokoukis

12/12/12

 

The debate over the role, if any, that the Community Reinvestment Act played in the buildup to the Financial Crisis has been heated, to say the least. Conservatives think the the CRA is a classic case of government action leading to unintended consequences — in this case a lowering in underwriting standards that helped inflate subprime housing bubble. But liberals have typically disagreed. Columnist Paul Krugman has called the CRA “irrelevant to the subprime boom.”

 

And most studies have tended to support the Krugman view. But an important new one does not.

 

Here are the conclusions of “Did the Community Reinvestment Act (CRA) Lead to Risky Lending?” by Sumit Agarwal of the National University of Singapore’s business school, Efraim Benmelech of Northwestern University’s Kellogg School of Management. Nittai Bergman of MIT’s Sloan School of Management, and Amit Seru of the University of Chicago’s Booth School of Business:

 

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming. …

(Snip)

 

(Snip)

 

H/T Gateway Pundit