The Community Reinvestment Act: A Preliminary Empirical Analysis

The purpose of the Community Reinvestment Act (CRA) is to encourage financial institutions "to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions." Recent scholarly criticism of the CRA has argued that the standards it imposes are extremely vague and subjective, frequently force banks to make bad loans, and penalize banks that have conservative lending policies or hold assets in the form of marketable securities. In their Article, Professors Bierman, Fraser, and Zardkoohi have undertaken a preliminary empirical analysis of the CRA. They have collected the CRA ratings for all banks rated from July 1, 1990 through the first quarter of 1992, and correlated these ratings against a wide range of financial and other data including asset size, membership in a holding company, profitability, makeup of loan portfolio, assets held in marketable securities, and publicly traded versus nontraded status. Their data confirms much of the recent scholarly criticism.

While recent Clinton administration proposals address some of these criticisms, Professors Bierman, Fraser, and Zardkoohi's study suggests continuing problems with the CRA.