Development Banks Seen Needing Their Own Fed
Zahodiakin, Phil, American Banker
Congress should set up a new Federal Reserve System to fund and regulate community development banks, an economist told a panel of law-makers this week.
Dimitri B. Papadimitriou, executive director of the Levy Economic Institute at Bard College in Annandale-on-Hudson, N.Y., said the model most frequently suggested for development banks - South Shore Bank of Chicago - will not work on a national scale.
South Shore relies on socially responsible people to invest in the bank - and accept below-market returns, Mr. Papadimitriou told the House Small Business Committee's subcommittee on Regulation, Business Opportunities, and Technology.
But relying on philanthropy to support a nationwide bank system would be unrealistic, Mr. Papadimitriou said.
He also dismissed proposals to offer existing banks Community Reinvestment Act credits for investing in development banks, and proposals to federally guarantee their own developmental lending.
"Credits are inappropriate because they would not strengthen CRA lending, and federal guarantees would just establish a new welfare system," Mr. Papadimitriou said in an interview. "Community development banks should be as profit-seeking as commercial banks."
Under his proposal, Congress would earmark $1 billion for a Federal Bank for Community Development Banks. The new "Fed" would match up to $5 million in private investment in the new banks, playing the dual role of investor and regulator. …