Community Reinvestment Act: How Much Is It Worth in the Southeast?

  • Community Development Finance
  • Community Reinvestment Act

Our recent article provided a geographic and strategic overview of the Community Reinvestment ActOff-site link (CRA). As we noted, the act encourages depository institutions to help meet the credit needs of the communities where they operate. However, quantifying the economic impact of the CRA on low- and moderate-income (LMI) communities is challenging due to inconsistent reporting on community development lending and investment. A recent Congressional Research Service reportOff-site link Adobe PDF file format notes the difficulty of determining the extent to which CRA incentives influence bank lending and investment in LMI markets relative to other financial and contextual factors.

CRA-motivated activities
That said, we are sometimes asked about the approximate scale of CRA-motivated activities in a particular geography. Community development practitioners want to know how much banks are investing in their neighborhood, community, or region so they can "right-size" their strategy for bank partnerships.

Because CRA-motivated activities cut across different geographies, business lines, and functional areas, it is difficult to aggregate a bank's CRA activities into a single number. In the retail lending space, lending to LMI borrowers and geographies through mortgage, small business, and farm loans is one area where a bank's activities can be easily quantified and compared across institutions. Reports with data on these types of loans for each bank are available from the Federal Financial Institutions Examination CouncilOff-site link (FFIEC).

But when it comes to community development services, lending, and qualified investments, standard data are not easily available. Our analysis focuses on community development lending and qualified investments in the Atlanta Fed's Sixth District, which comprises the states of Georgia, Florida, and Alabama, and parts of Mississippi, Louisiana, and Tennessee (see the map). Note that in the analysis that follows, data from the entire states of Mississippi, Louisiana, and Tennessee are included.

We started by asking, in the Sixth District states, what are the top banks in terms of deposit market share? Chart 1 includes those banks holding approximately 65 percent of all deposits in those states.

Then, from the banks with significant market share in the Sixth District, we pulled a convenience sample of 10 regional banks, which we call our Southeast bank sample, and reviewed their most recent CRA public evaluations, which are available from FFIECOff-site link. The approximate time frame for evaluations included in our sample was 2007–13. Banks in the sample are SunTrust, Regions, BB&T, Synovus, Compass, Whitney, EverBank, Fifth Third, BankUnited, and Iberiabank; together, they hold approximately 30 percent deposit market share in the Sixth District states.

Data on community development lending and investment were extracted from CRA public evaluations and annualized. Chart 2 summarizes data from our sample.

Overall, the banks in our sample hold approximately $600 billion in deposits across all the markets they serve. The sample represents about 30 percent of the total deposit market in Sixth District states. These banks provide approximately $5.5 billion in community development lending and investment annually across all markets. Across the sample, 50 percent of the banks' deposits were located in Sixth District states. Therefore, we assumed that 50 percent of the banks' community development lending and investing would also occur in the Sixth District states, which led us to a figure of $2.75 billion annually. It is important to note that banks' community development investment and lending activity is likely to vary across the geographies they serve and the banks headquartered in the Southeast may in fact lend or invest at an even higher rate in certain locations.

Next, we divided the data to illustrate activities across categories for community development lending, qualified investments (with expectation of financial return), and qualified investments or "grants" (without an expectation of financial return). Charts 3 and 4 indicate that, in general, these particular community development activities tend to be divided 60 percent lending, 40 percent investments with expectation of financial return, and less than 1 percent grants.

Finally, we made two additional assumptions to approximate the scale of community development lending and investment in the Sixth District states.

  • We assume that large banks provide the vast majority of community development loans and investments. Large banks (as defined by the CRA) are those with assets greater than $1.2 billion. There are 103 large banks in the Sixth District states, which collectively hold more than 80 percent of all deposits. This is not meant to suggest that small banks do not make community development loans and investments. However, these banks vary tremendously in terms of their relative commitments to those types of loans. Because it would be impossible to generalize, we have excluded these banks from our model and therefore recognize that it is to some degree an underapproximation.
  • We assume that our Southeast bank sample is representative of other large banks in terms of community development lending and investing. In other words, we assume a standard ratio of community development loans and investments to deposits based on our sample.

With these assumptions, we calculated the ratio of community development lending and investments to total deposits for our sample (.0092 or 0.92 percent). Importantly, this ratio is based on observed activities and should not be misinterpreted as an acceptable industry standard. Excluding the deposits held by banks in the Southeast bank sample, large banks in the Sixth District hold deposits of $5.4 trillion. Using the ratio calculated from Southeast bank sample, this suggests that large banks in the Sixth District provide community development lending and investment of approximately $49.7 billion across all markets. Then we know that, across these large banks, 10 percent of bank deposits are held within Sixth District states, suggesting that approximately $4.97 billion in community development lending and investment are provided in the Sixth District by the remaining large banks (see chart 5).

Based on this analysis, we approximate that banks in our Southeast bank sample provide $2.75 billion in community development loans and investments annually. Further, we estimate that other large banks provide an additional $4.97 billion annually, resulting in a total estimate of $7.7 billion in community development loans and investments annually across Florida, Georgia, Alabama, Mississippi, Louisiana, and Tennessee.

Concluding thoughts
The purpose of this inquiry has been to approximate the scale of CRA-motivated community development lending and investment across the Atlanta Fed's six-state district. The figure of $7.7 billion per year is meant to provide community development practitioners and policymakers with a sense of the "size of the ocean" in which they are swimming in terms of community development resources provided through CRA-motivated bank activities. This is by no means an exact figure and we recognize that there are many factors that may influence banks' geographic allocation of resources. Further disaggregation to the state level is possible, assuming per capital allocation of community development resources, but we were not comfortable with that assumption as a standard. Nonetheless, it is one way to take the analysis a step deeper.

For additional information on CRA:

General resources are available from the Federal Financial Institutions Examination CouncilOff-site link or through the regulatory agencies:

By Will Lambe, community and economic development senior adviser, and Jessica Farr, manager of examinations in supervision and regulation