How increased enforcement can offset statutory deregulation

Purpose - This paper aims to estimate the cost to US savings banks and savings and loan institutions with assets under $250 million of complying with the anti‐redlining Community Reinvestment Act (CRA). Design/methodology/approach - Compliance cost is modeled as a type of inefficiency because the lending institution is required to favor higher cost borrowers whom it might otherwise choose to avoid. Inefficiency is estimated using a special form of regression with a two‐part error term that contains an inefficiency parameter. Findings - The 1995 statutory changes designed to lessen the cost of CRA compliance are apparently more than offset by the increased enforcement efforts of the Clinton Administration, which was hostile to deregulation enacted by Congress. For the vast majority of small thrifts, annual compliance costs grew by $251,000 following “deregulation,” and for a small number of “Outstanding” (in meeting the goals of the Act) institutions, CRA‐related costs grew by $539,000. These increases represent a rise of about 3.5 and 6 percent of operating expenses, respectively. Practical implications - Given the wide latitude afforded financial regulators in the USA legislative changes regarded as “deregulation” also require a sympathetic and supportive administration to be realized. Originality/value - The paper offers insights into how increased enforcement can offset statutory deregulation, focusing on the case of the Community Reinvestment Act.