The Office of the Comptroller of the Currency has just released its latest CRA exam results. The news is hardly surprising – everyone passed!

In fact, of the 35 banks evaluated, 4 were given an “outstanding” and 31 were recognized as satisfactory. There were no “needs to improve” or “substantial noncompliance” ratings.

Grade inflation has run amok at the OCC for some time.

The OCC gave an outstanding rating to First National Bank of Audrain, located in Mexico, Missouri. This is in spite of the fact that FNB Audrain made no loans (zero) to low-income borrowers. There were plenty of low-income people in Mexico, Missouri. The OCC reports that it can characterize 16 percent of families in the area as low-income. FNB of Audrain made no loans in low or moderate income census (more…)

One of the comments made by policy makers studying the Community Reinvestment Act and its enforcement is that regulators have grown soft in their assessments of how banks and thrifts are serving the credit needs of communities.  Indeed, an apt comparison is to the grade inflation that exists in many other parts of society: students at colleges where the average GPA is 3.5 and Little League standards that dictate that all children get a trophy are just two of many examples.

In society, we have grown uncomfortable with calling out those who don’t live up to expectations.  That has a lot of ramifications. Right now, it is most visible in our willingness to help out institutions whose products have not kept up with the expectations of consumers in the marketplace.

Do we want banks and thrifts to be measured by these new, lower standards?

Before that question can be answered, it is worth seeing if the complaints of these policy makers are well-grounded. The evidence, if it exists, would be found in some kind of systematic analysis

of the CRA assessments given to banks and thrifts by their examiners. The first chart shows the changes in grades between 1990 and 2008.  It covers CRA exams from all of the regulatory agencies.

The full spectrum of banks are included, from the smallest to the largest (Citi, B of A, JP Morgan Chase, Wells).

This chart shows a few things.  One of the most obvious things to observe is that the absolute number of exams has dropped considerably. The most dramatic fall-off was between 1999 and 2000.

The impetus for this change was the Gramm-Leach-Bliley Act.  Among its amendments was a new rule that “small” banks with an outstanding rating would be excused from further CRA exams until 5 years hence.  Perhaps more significantly, small banks with even a “satisfactory” rating were given four years between exams.

Then, the other question focuses specifically on the share of banks and thrift exams that trigger some kind of response from regulators. Both a “substantial non-compliance” or a “needs to improve” rating prompt action by a financial institution.  These tests are built on three factors: an investment test, a lending test, and a service test.  For the most part, they are derived from quantitative metrics.  They are not a command and control regulatory focus, however.  While banks and thrifts are charged with an “affirmative obligation” to meet the credit needs of low-income residents and neighborhoods within their service area, they are free to choose how they execute that goal.

It appears that regulators believe that banks and thrifts have improved, by as much as a factor of ten, since 1990.