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Do We Need Bureaucrats to Ensure that Banks Maximize Profits?

In this op-ed in yesterday’s NY Times, former Treasury Secretary Robert Rubin and a co-author (Michael Rubinger) argue that the Community Reinvestment Act should not be repealed.

This Act (the "CRA") was enacted in 1977, ostensibly to stop commercial banks from discriminating, in their lending decisions, against borrowers in low-income communities.

Tim Worstall rightly wonders if there was genuine evidence of lending-discrimination – "redlining," as it is called – back in 1977. Tim is doubtful, and he might be right. But because the CRA was enacted before banking deregulation, I’m open to the possibility that the artificial monopoly power granted banks by Uncle Sam resulted in some measurable amount of redlining.

Either way, banking is much more competitive today, and banks in competitive markets do not long survive if they routinely bypass opportunities to make profitable loans. Indeed, banks must aggressively seek all such loans – and the number of Internet pop-ups promising low home-mortgage interest rates and low interest rates for consumer-debt consolidation are just some of the more quotidian pieces of evidence of this competition.

This study released in 2002 by the Board of Governors of the Federal Reserve, and using data from 1995 through 2000, finds that the CRA does not detectably lower risk-adjusted mortgage interest rates charged by banks subject to the CRA.