Interstate Banking and Community Reinvestment: An Evaluation of How Bank Mergers and Acquisitions Influenced Residential Lending Patterns in St. Joseph County, Indiana, 1985-93

Author: Reynold F. Nesiba

Dissertation School: University of Notre Dame

Pages: 233

Publication Date: June 1995

Availability:
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Access Number: 8811

Abstract:
Two important issues face the banking industry today: discrimination in lending and banking industry mergers and acquisitions. Although financial economists have frequently written about these two issues independently, an abyss exists at their intersection. This dissertation begins filling this void in three important ways.

First it provides a discussion of the historical trends and legislative context for both the community reinvestment movement and the geographic deregulation of the banking industry and describes why these two issues are intimately intertwined. Second, it critically reviews both the theoretical and empirical literature concerned with discrimination in lending. This review resolves an important paradox about why empirical researchers always see the existence of racial discrimination in lending while economic theorists never do. Third, it answers the following question: What effect do bank mergers and acquisitions have on the allocation of residential housing credit?

Through an empirical evaluation of Home Mortgage Disclosure Act (HMDA) data, interviews, and other case study research techniques, I find that recent bank acquisitions in St. Joseph County, Indiana, have led to an increase in the number, dollars, and shares of loans made in low-income, moderate-income, and minority census tracts. However, I also find that the primary motivation for these trends result from the acquisition growth strategies of these institutions, combined with the manner in which the Community Reinvestment Act (CRA) is enforced.

This result has important public policy implications. Legislation allowing interstate branch banking was recently passed and will take effect beginning in 1997. This legislation is likely to lead to increased banking industry acquisitions and mergers. Legislation has also recently been proposed which would greatly weaken CRA. Allowing banks to engage in more acquisitions, while simultaneously weakening the CRA-the primary reason banks reinvest in low and moderate income and minority neighborhoods-is likely to reduce credit flows to these neighborhoods. Thus, the proposed CRA reforms should not be adopted.

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