Comment: It's Hard to Find a Rationale For CRA in Today's Market

The Community Reinvestment Act has always been something about which I have had mixed emotions.

Viewed in the context of the way markets should operate, CRA was a bad idea whose time should never have come. If there is sufficient demand for a product or service at a market price, the marketplace will find a way to meet the demand.

On the other hand, the financial marketplace in the United States has not always been permitted to operate freely. Banks and thrifts had relatively exclusive licenses to operate in certain geographic areas when CRA was adopted in 1977. Restrictive chartering practices and restraints on geographic expansion limited the number of competitors in a locale.

Viewed in this context, CRA had a rationale. If the depository institutions operating in an area were gathering deposits and not reinvesting in the local community, there were few alternatives for making up any shortfall. Thus, it seemed reasonable to expect depository institutions to make commitments to their communities as the quid pro quo for their licenses.

Across a span of nearly two decades since CRA was enacted, the financial landscape has changed enormously. Where banks and thrifts once enjoyed more than a 60% share of the financial services marketplace, their share is now half that amount.

Indeed, the situation in the marketplace has become so grim for thrifts, some people question whether they can survive in their present form.

The marketplace has taken away the relatively exclusive license that banks and thrifts enjoyed not so long ago. Nondepository intermediaries export far more money from local communities today than banks or thrifts could ever imagine capturing.

Not only have banks and thrifts lost their exclusivity vis-a-vis other types of intermediaries, they have also lost it with respect to each other. Last year's nationwide branch banking bill means that no geographic market of any consequence is protected from invasion by competing banks and thrifts.

It is exceedingly difficult in light of the cold reality of the modern financial services marketplace to find any role for CRA, much less for a CRA applied exclusively to banks and thrifts. It is nearly impossible to imagine a significant demand for any financial service at a market price that would not be met by some intermediary. If existing competitors in the marketplace do not meet the need, new competitors will enter.

A friend who is an executive at a leading bank recently suggested an alternative to the current CRA. His plan appears to be a vast improvement over the current approach. Certainly it's more in touch with marketplace realities.

He would let the public vote with its pocketbook about which financial intermediaries to reward and which to punish. The public doesn't need a bunch of bureaucrats deciding what it should want from financial institutions. Give people the information they need to evaluate the performance of various intermediaries, and let them decide which intermediary is doing the best job of serving them.

My friend would make CRA a disclosure law applicable to all financial intermediaries above a certain size. The government would prescribe a format for these firms to disclose their lending or investment policies and their commitments to community needs.

The government would not mandate lending or other community activities by financial institutions. It would limit itself to ensuring that the disclosures made by institutions are complete and not misleading, much like the Securities and Exchange Commission does today with respect to securities filings.

Then consumers of financial services would be in a position to determine the institutions with which they want to do business. Do they want to reward those with a commitment to the local community or would they rather receive a higher return on their money? Would they rather do business with a financial institution that supports the arts, one that is involved in youth sports activities, or one that helps restore neighborhoods?

A system along these lines would probably have far more impact than the current CRA. It would require all financial intermediaries, not just banks and thrifts with their diminishing market shares, to think through the image they want to have in their communities and the role they want to play.

Financial intermediaries would begin to view CRA as a vehicle for gaining acceptance in the marketplace, not as a bureaucratic nightmare scarcely to be tolerated. We could do worse - indeed, we already are.n Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is chairman and chief executive officer of Secura Group, a financial services consulting firm based in Washington.

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