February 12, 1995
By Hal S.
Hal S. Scott is Nomura Professor of International Fin ancial
Systems, Harvard Law School. 11is is an updated version of his
March 30, 1994, remarks to The Heritage Foundation's Regulatory
Reform Advisory Council. ISSN 0272-1155 0 1995 by The Heritage
proposals. Under the Investment Test, qualified investments
include grants to minority- and women-owned. financial institutions
and to organizations engaged in affordable housing rehabilitation
and construction, as well as not-for-profit 'Organizations serving
community economic development needs or supporting activities
essential to the capacity of low- or moderate-income individuals to
utilize credit or sustain economic development. Naturally, the
regulations do n o t require any assessment of the performance of
the grantees. Similar goodies for community groups are available
under the Community Development Test for wholesale banks. Small
banks get an exemption from these requirements; instead, they must
comply with a watered-down version of the regulation. Why is there
an exemption for small banks at all? Is this another manifestation
of small is beautiful? The reason, of course, is clear-the Admini-
stration feared their opposition. Small banks were not exempt from
p revious CRA requirements. There is no reason to give small banks
a competitive edge over large banks, and at the margin such
exemptions may discourage productive consolidations or mergers.
These new proposals will be quite costly and counterproductive. Re
a l costs will be im- posed on the general public. Borrowing costs
will go up, and tax revenues (which will have to be made up
somewhere) will go down. Productive activity will decrease. In the
longer term we risk endangering the banking system, and ultimat e
ly the American economy, by adopting those kinds of
command-and-control credit policies. The only virtue of the Clinton
proposals is to show how costly the CRA is when taken se- riously.
The right thing to do now is to repeal CRA; even in its
watered-down form it was undesirable, basically offering leverage
to community groups to grind their particular axes or enrich their
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