Diversity at the Federal Reserve is related to lending practices

Read Board Diversity Matters: An Empirical Assessment of Community Lending at Federal Reserve by profs Brian Feinstein, Peter Conti-Brown, and Kaleb Nygaard. Here is the abstract:

This working paper shows that the increased presence of minority directors on the twelve regional Federal Reserve Banks — the quasi-governmental entities responsible for evaluating many commercial banks’ lending to underserved communities — is associated with greater lending to these communities. To assess this relationship, we leverage original data on the demographic characteristics of Reserve Bank boards of directors and exploit three unusual features of the U.S. financial regulatory system. First, that some Reserve Districts bifurcate states allows for comparisons of lending postures for commercial banks subject to identical state banking regulations — and, for geographically proximate banks on either side of the line, substantially similar economic conditions — but different Federal Reserve Bank supervisors. Second, that Federal Reserve Banks evaluate some commercial banks’ community lending and other federal regulators evaluate this activity at other commercial banks within the same geographic region presents another comparison group. Third, a 2010 statutory change that reduced some directors’ roles in Reserve Bank governance enables analysis of the extent to which director diversity is correlated with community lending before and after this legal change that presumably tempered some directors’ power over regulated commercial banks but left other directors’ authority unaffected.

Empirical analyses based on all three identification strategies show consistent evidence that racial diversity on Reserve Bank boards is associated with Fed-regulated banks’ increased lending to underserved groups. That diversity can be consequential even where, as with the Fed, the connection between the organization’s leadership and policy outcomes is attenuated encourages greater scholarly attention to the influence of diversity on outcomes in other public- and private-sector contexts.

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