Ray Brescia Reports on Grading Banks

The short version, coauthored with John DeStefano, is at HuffPo. Here's an excerpt:

CIRC is a system for scoring local banks on a variety of issues that are important to consumers, like the amount banks charge their customers to open and maintain accounts, the location of their local branches and ATMs, and the nature and extent of their home mortgage lending in the community. Point values are assigned to each category of information. For products and services, a high score -- usually three points -- was given to a bank if it went far in providing services the typical consumer would want: like offering checking accounts with low minimum balance requirements and at no fee. A weaker showing in a particular category would earn a bank a lower score in that category. With home mortgage lending, each bank that serves the New Haven community was measured against the lending practices of the other banks operating in the community. For example, by determining whether their loan denial rate was higher or lower than the median rate in the community, or their lending to blacks and Latinos was consistent with the practices of the other banks, we were able to determine whether each bank's practices were better or worse than those of its peers. The system assigned point values under each home mortgage category similar to those applied in the products and services categories.

A longer version, written with Sonia Steinway and titled Scoring the Banks: Building a Behaviorally Informed Community Impact Report Card for Financial Institutions to appear in 18 Fordham Journal of Corporate and Financial Law (2012) is available on SSRN. Here's the abstract:

The U.S. financial system faces a crisis. Unlike fiscal crises, this one is of consumer confidence and trust. Recent polls suggest that faith in American banks is at a 40-year low. Many blame the banking sector for having a significant role in causing and exacerbating the financial crisis of 2008 and the deep recession that has followed it. Scandals, litigation and a lack of accountability for conduct that has breached the public trust mean that many consumers of bank services are starting to call for greater transparency in banking practices, financial institutions that are more responsive to community needs, and broader array of alternatives to traditional banks. Movements such as the Move Your Money campaign and Bank Transfer Day have captured the imagination of many bank customers who are looking to use their consumer clout to support financial institutions that are engaged in responsible practices.

Perhaps as a way to counter this crisis in confidence, regulators, local governments and consumers alike seek ways to measure bank responsiveness to consumer wishes and community needs. This paper describes one such tool: the Community Impact Report Card (CIRC). Modeled on other grading systems — like New York City’s method for grading restaurants — and informed by principles of behavioral economics, the CIRC is a tool designed to offer consumers a means through which they can easily comparison shop between banks based on those banks’ effectiveness in meeting consumer demand for accessible and inexpensive products and services, and to encourage banks to strengthen the array of products and services they offer. By providing a range of information about the products and services offered by local banks, and generating a single score for each bank based on this information on a scale of 1-100, consumers will have an easily accessible way to compare how each bank serving the community is generally responsive to community needs and interests. Flexible and adaptable, the CIRC system is designed to be crafted to the needs of local communities and to apply to the array of financial institutions that serve them.

It would be great if this worked (regular readers may recall that we have blogged about a similar idea, but this seems well beyond what we wrote about). It has worked for restaurants, and has improved them in ways that benefit not just those who pay attention to the grades, but also those who don't..