Safety and Soundness and the CRA: Is There a Conflict?

Jeffery W. Gunther ()
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Jeffery W. Gunther: Federal Reserve Bank of Dallas, 2200 N. Pearl St., Dallas, TX 75201.

Economic Inquiry, 2002, vol. 40, issue 3, 470-484

Abstract: Ordered probit regressions of the supervisory ratings assigned to banks point to a conflict between the credit enhancement objectives associated with the Community Reinvestment Act (CRA) and financial safety and soundness standards. Aggressive banking strategies tend to help CRA ratings but hurt safety and soundness ratings. In addition, banks with financial problems are more likely to receive substandard CRA ratings, even though their condition may require a retrenchment from CRA objectives. Finally, there is some limited evidence to suggest that a greater focus on lending in low-income neighborhoods helps CRA ratings but at the expense of safety and soundness. Copyright 2002, Oxford University Press.

Date: 2002
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