This chapter revisits a proposal I made fifteen years ago to redesign CRA in a way that harnesses market forces. Specifically, I proposed that banks be permitted to trade their CRA obligations with one another in a manner analogous to 'cap and trade' regimes used to address environmental pollution. A tradable obligation approach to CRA has the potential to enhance the provision of financial services to low- and moderate-income communities. The potential advantages stem from three sources: The allocation of CRA obligations to banks best able to fulfill them; the promotion of specialization in serving CRA-qualified communities; and increased concentration of lenders in CRA-qualified communities. Specialization and concentration could promote cost efficiencies, the amelioration of information-based market imperfections, and the internalization of externalities associated with CRA-qualified services.
Changes in the financial services sector and in community development institutions make this approach potentially more attractive today than it was when I first proposed it. Banks’ lending outside the areas in which they are physically located has expanded substantially; other types of financial institutions not currently subject to CRA now make a high volume of home mortgage loans; and community development financial institutions have developed that could facilitate the allocation of services to CRA-qualified communities.