The Social Externalities of Bank Disclosure Regulation: Evidence from the Community Reinvestment Act
We investigate the impact of bank disclosure regulations on local business activities by exploiting the 2005 Community Reinvestment Act (CRA) reform, which exempted a group of banks from federal mandatory disclosure requirements for geographic loan distribution. We find that low and moderate income (LMI)-neighborhoods experience a significant decline in small business growth, small business employment, and wages following the disclosure reform. The negative impact on small businesses is particularly pronounced in LMI areas with a high proportion of racial minority population. Using hand-collected data, we also document that non-disclosing banks indeed reduce lending to LMI areas after the reform, consistent with our results being driven by the bank credit channel. Together, our findings suggest that the disclosure elimination causes negative externalities on marginalized communities that the CRA specifically targets to protect. Overall, our findings highlight the effectiveness of mandatory disclosures as a policy tool in incentivizing banks’ social behavior.
disclosure regulation, banks, ESG, small businesses, CRA
SMU Cox: Accounting (Topic)