Economic Quarterly

2002

 

Spring 2002

What Can Price Theory Say about the Community Reinvestment Act?

John R. Walter and Robert L. Lacy

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.

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