Does the Community Reinvestment Act (CRA) Crowd Out Corporate Lending?

Ruichang Lu, Massimo Massa, Wenlan Qian and Hong Zhang

No 19396, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The Community Reinvestment Act (CRA) promotes mortgage lending by banks to low- to mid-income borrowers. Could it consequently crowd out corporate lending? Our findings suggest the opposite, as relationship and investment-grade firms receive more loans from CRA-regulated banks. These CRA-induced loans are larger and cheaper ex ante but carry a moderately higher distress risk ex post. Recipient firms repurchase shares instead of making investments. These findings suggest a novel and unintended crowd-in policy implication. Banks subject to bank-level risk constraints may be incentivized to extend credit to high-quality corporate clients to offset the CRA-induced risk from mortgage lending.

JEL-codes: G12 G2 G32 (search for similar items in EconPapers)
Date: 2024-08
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