State activism and the hidden incentives behind bank acquisitions

A number of studies have shown that, as a result of the ambiguity of US legal mandates, organizations have considerable latitude in how they comply with regulations. In this paper, we address how the different agendas of the federal and state governments increase ambiguities in state-firm relations and how states are interested actors in creating opportunities for firms to navigate the federal legislation. We analyze the institutional forces behind bank acquisitions within and across state lines in order to illuminate the ways that US states take advantage of federal ambiguity and are able to shape corporate practices to their benefit. We specifically examine how patterns of bank acquisitions are shaped by the crucial relationship between the federal Community Reinvestment Act (CRA) and a little-understood provision in the federal tax code that is implemented at the state level, the Low-Income Housing Tax Credit (LIHTC). The relationship is complex because, while the federal government uses the CRA to control bank acquisition activity, states promote use of the LIHTC, through which banks can address federal CRA concerns, and thereby promote bank acquisitions in their jurisdictions. Thus, our findings suggest that the implementation of social legislation at one level in a federal regulatory system undermines the mechanisms of social legislation at another level. We use archival research and in-depth interviews to examine the interaction between these institutional processes and formulate hypotheses that predict the ways in which bank acquisitions are constrained by banks' CRA ratings and the way states in turn help banks overcome their CRA constraints. Quantitative analyses of all bank acquisitions in the United States from 1990-2000 largely support these hypotheses.