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 C.E.P.R. Discussion Papers

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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