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CRA--thinking out loud (forwarded)
>Mary Higson wrote to me:
>>Has the use of increased bank reserves in developing countries helped in any
>>way to achieve any of the goals of CRA? It seems to me that allows banks to
>>pay to get out of their responsibility in making money available for lending
>>to the CRA targets. The CRA targets seem to suffer in both your example and
>>Please, if I've missed something here such as that the increased reserves
>>capitalizes a say, revolving loan fund operated by the government, or any
>>other element that would benefit the CRA targets. Otherwise I have to
>>conclude that the punishment doesn't solve the problem.
>>I'm afraid I've forgotten how to post to the list, or I would have sent this
>>to the list for more input.
>>P.S. I am cancelling my AOL account today; please send any email to me at
>In some cases the funds had to be parked with a specialized agricultural
>bank, increasing their lending base; in others they were simply held as
>additional required reserves with the central bank, presumably helping
>finance the government budget. These alternatives were not quite
>"punishment," rather a business option.
>From a public policy standpoint, there would seem to be certain
>circumstances in which banks might not have to be held to CRA targets. A
>specific case would be banks that are in poor shape. Should taxpayers be
>burdened by a bank failure (this is the worst-case scenerario) to which
>CRA lending or additional CRA lending is a major contributor? And how
>about the cases where meeting CRA targets crowds out those just "above" or
>outside the CRA targets, possibly small businesses or still relatively
>poor borrowers? In these cases social losses are imposed, and in the
>latter case possibly by those who may not be in the best position to bear
>them. One can imagine that in the imperfect world of regulation the net
>social impact could be negative in some cases. How to identify these
>cases remains a challenge, but here I am concerned with the theoretical
>construct or policy basis.
>These concerns were those we dealt with in trying to build more socially
>useful banking systems through development assistance during my career
>with one of the large donor agencies.
>One area in which there may be a material difference between the usual
>development bank case in the Third World and CRA lending is that the
>development bank lending, especially in agriculture, frequently produced
>low quality loans. This was due to poor pricing and controls, powerful
>political agendas, political interference in loan allocation, and other
>incentives for both borowers and lender that did not lead to good loans.
>CRA lending, on the other hand, is often cited (in my limited reading) as
>having loss profiles not greatly different from mainstream mortgage
>portfolios or credit card portfolios. I'd like more information on the
>quality of CRA lending if anyone could direct me to a source, especially
>data provided by banking regulators.
J.D. Von Pischke
2529 Trophy Lane
Reston VA 20191-2126
(703) 860 5654
fax (703) 758 1388
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