Community Development Banks: an Idea in Progress


February 01, 1993|By NEAL R. PEIRCE

If the Clinton camp thought it would be easy to deliver on the president-elect's promise to create 100 community-development banks for poor, capital-short communities, it's learning otherwise.

Ideas on how to do it were ricocheting back and forth among fiscal gurus during the Clinton transition, on the Senate Banking Committee, and among grass-roots credit unions and loan funds, big national intermediaries for low-income housing and lobbyists for mainline banks.

No one disagrees it would be a great thing to create dozens of clones of Chicago's famed South Shore Bank, the model that first got President Bill Clinton's attention. In its 20 years of existence South Shore has all but transformed the economic and social life of the strongly blue-collar, black community where it operates.

South Shore did it by doing what a local bank is supposed to -- know its neighborhood and borrowers, assist small businesses, lend to homeowners, show a profit. It stemmed the typical ''capital flow'' out of low-income neighborhoods by returning, in Mr. Clinton's words, to the ''radical idea that banks ought to make loans to people who deposit in their bank.''

Among other things, South Shore can take credit for financing the renovation of 7,716 apartment units (close to one-third the neighborhood's total) plus a $10 million shopping center in a store-poor area.

But success came only with years of painstaking effort, plus a bolstering of the bank's capital base by millions in deposits from foundations, churches and socially minded individuals.

What would Mr. Clinton's new generation of community development banks (CDBs) have to look like? The debate about them is generating some consensus. First, their mission must be serving disadvantaged neighborhoods or people.

Second, they'd have to be full, federally insured depository institutions -- providing banking services in neighborhoods where banks have almost disappeared and assuring thorough regulatory oversight by examiners and insurers.

Third, they'd have to work in close partnership with community development corporations, local loan funds, microenterprise programs and the entire growing network of grass-roots organizations trying to make credit available where it too often isn't -- for families struggling out of poverty, start-up and small businesses, day-care providers and not-for-profit housing developers.

Shore Bank fills that definition, as does its principal clone -- Arkansas' four-year-old Southern Development Bankcorporation, which operates through subsidiary institutions in 32 rural counties. Its most famous board member in Hillary Clinton.

But after that, there are only two true CDBs in all the United States now -- the Durham, N.C.-based Self-Help Development Bank and the two-year-old Community Capital Bank in Brooklyn.

So the idea of launching 100 community development banks and expecting them to accomplish much in four years, even with hefty federal subsidies, is ambitious and risky.

How open-ended would a federal subsidy be? Who'd provide the rest of the capital? What if a new CDB developed so slowly it had almost no impact on its community?

Then there's a skills deficit. Few bankers in America have the combination needed -- the ability to judge and monitor small and unconventional loans, plus the entrepreneurial bent to encourage businesses and would-be home owners to expand the investment base in their neighborhoods.

So what's the answer? One approach is to stage an open competition for any and all entrepreneurial community-based organizations, from credit unions to housing and small business co-ops, to try to make the leap. Associates of Durham's Self-Help Development Bank suggest the federal government could ''initially seed many promising 'pre-CDBs' and scale up the grant capital and other support as the strong performers emerge.''

Mainstream banks should be encouraged to create more low-income community-oriented subsidiaries. There are already over 100 so-called ''bank community development corporations,'' and banks could easily form still more and strengthen the ones now in operation.

As Shore Bank founder Ronald Grzywinski has suggested, commercial banks could be allowed some of the new privileges they're seeking (interstate branching, mutual fund management, securities underwriting) -- but only when they show ''the most exemplary performance in meeting the credit needs of their community service areas.''

But there's also the challenge of financing the so-called ''transaction costs'' in community-based lending. Checking credit histories, collateral and business plans for a $5,000 ''micro-loan'' may take as much of a bank officer's time, for example, as a standard $500,000 commercial loan.

A solution suggested by one Clinton transition team member was to offer CDBs access to a Federal Reserve system ''discount window'' providing a continuing interest margin they could use to underwrite home or business loans with high transaction costs. The idea's appealing: It's based on actual bank performance. A similar ''discount window'' might be opened to regular banks when they lend in distressed neighborhoods.

Politically, Clinton & Co. will likely insist on 100 ''new'' community development banks to claim a campaign promise is fulfilled. But look for equally exciting, perhaps even greater dividends if the upcoming debate illuminates a whole array of ways the American banking and credit system can be reshaped to help poor people and neighborhoods become less poor.

Neal R. Peirce writes a column on state and urban affairs.

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