Working Paper

"Revitalize or Stabilize": Does Community Development Financing Work?

Abstract: Banks in the United States originate $100 billion in community development loans every year and hold a similar amount of community development investments on their balance sheets. A number of federal place-based policies encourage the provision of these loans and investments to promote growth, employment and the availability of affordable housing to disadvantaged communities. Research into the effectiveness of privately supplied community development financing has been hampered, however, by the lack of comprehensive data on banks' community development activities at a local level. Hand collected data from thousands of Community Reinvestment Act performance evaluations fill this gap. Using these data, the effect of the supply of community development funding on local economic outcomes is estimated. Endogeneity of community development financing to local demand factors is addressed, exploiting the fact that banks exhibit fixed tendencies to engage in community development financing across markets. Shifts in the share of local deposit markets toward banks with a greater tendency to supply community development loans are associated with subsequent expansion in total employment and wages paid. Estimates suggest $56,000 in community development lending is required to create one job, on net. There is no measurable effect on the supply of affordable housing or the growth of house prices. Counties experiencing a shift in local deposit market shares toward community development intensive banks were on similar pre-trends as the rest of the country in the years prior to the shift, as measured across a range of economic and credit market outcomes.

Keywords: Community development; Community Reinvestment Act; Place based policies; Bank lending; Credit supply;

JEL Classification: R11; G21; G28;

https://doi.org/10.17016/FEDS.2020.029

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2020-04-15

Number: 2020-029