January 28, 2002

The Efficacy and Efficiency of Credit Market Interventions: Evidence from the Community Reinvestment Act

Jonathan Zinman

Economies around the world are marked by major interventions in credit markets. Institutions ranging from central banks to the Grameen Bank operate under the assumptions that credit markets are imperfect, that these imperfections can be ameliorated, and that doing so increases output. There is surprisingly little empirical support for these propositions. This paper develops evidence on related questions by exploiting changes to a major intervention in U.S. credit markets, the Community Reinvestment Act (CRA). Using data on both banks and potential commercial borrowers, I find evidence that CRA does increase credit to small businesses as intended. I then exploit these CRA-induced supply shocks to identify the impact of credit increases on county-level payroll and bankruptcies. There is some evidence of real benefits at plausible implied rates of return on CRA borrowing, and little suggestion of crowd-out or adverse effects on bank performance. The findings therefore appear consistent with a model where targeted credit market interventions can improve efficiency. Ongoing work seeks to identify whether CRA does in fact ameliorate any particular type of credit market failure…

Category: Working Papers

Read More About: Neighborhood Change