When the Community Reinvestment Act (CRA) was instituted almost 25 years ago, the financial landscape was a profoundly different place. Back then, financial institutions were just sticking their toes into the waters of deregulation; today, it's sink or swim in a market where bank consolidation is a common occurrence. For instance, in 1977, there were 14,411 federally insured commercial banks; in 2000, there were only 8,581.
Technology-driven changes also have had a significant impact on the financial markets. Through the Internet, even the smallest financial institution has access to a global market. And stock trading by the general public—unthinkable just a few years ago—is now commonplace. Likewise, legislation continues to reshape the structure of the financial industry. The ultimate impact of developments spurred by Gramm-Leach-Bliley, and the extent to which the industry will change as a result, will not be known for some time.
Amid these developments, the purpose of CRA—making credit available to all communities, including low- and moderate-income neighborhoods—has remained largely unchanged, as has its role in the marketplace—helping provide affordable housing, employment and small business development. The financial environment, however, is more complex now, as are the transactions to which CRA is applied.
Clearly, opinions differ widely on the effectiveness of CRA. If I put my economist hat on, I'd say that, in general, we should let the markets decide where development funds are invested. On the other hand, we've witnessed scores of successful community development projects in low- to moderate-income markets that have been completed since the passage of CRA. Would banks have provided funding for such projects without CRA? Who knows? What's clear is that sound analysis and open discussion will be essential in furthering our understanding of CRA's role in community development and today's complex financial markets.
William Poole is the president of the Federal Reserve Bank of St. Louis. This article is adapted from a speech Poole gave at the Fed System's Community Affairs Academic Research Conference, April 6, 2001, in Washington, D.C.