Title: The association between Community Reinvestment Act ratings and loan loss

Authors: Myojung Cho; Kwang-Hyun Chung

Addresses: Lubin School of Business, Pace University, 1 Pace Plaza, 4th Floor, NY 10038, New York, USA ' Lubin School of Business, Pace University, 1 Pace Plaza, 4th Floor, NY 10038, New York, USA

Abstract: The Community Reinvestment Act (CRA) of 1977 purports to ensure fair access to credit for all communities, including low- and moderate-income areas. Our study investigates whether the CRA ratings are associated with bank loan loss estimates and loan validity. We find that the passing CRA ratings - 'outstanding' and 'satisfactory' - are negatively associated with loan loss provisions, and this result is driven by non-discretionary loan loss provisions. We also find that banks that pass the CRA examinations have stronger loan validity than those that fail. When we compare the two passing ratings, we find that banks with 'outstanding' ratings have lower loan loss provisions and better loan validity than those with 'satisfactory' ratings.

Keywords: Community Reinvestment Act; allowance for loan losses; loan loss provisions; discretionary loan loss provisions; loan validity.

DOI: 10.1504/IJBAAF.2024.144603

International Journal of Banking, Accounting and Finance, 2024 Vol.14 No.4, pp.407 - 442

Accepted: 01 Oct 2024
Published online: 24 Feb 2025 *

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