Statement by Griffith L. Garwood, Director, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve Board System, before the Subcommittee on Financial Institutions Supervision, Regulation and Deposit Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 3. 1993

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Thank you for inviting us to share the Federal Reserve's perspective on bank-related community development corporation (CDCs) and other types of community development equity investments. In my testimony today, I will confine my discussion primarily to bank holding company CDCs and community development investments, which are approved by the Federal Reserve. State-chartered banks that are Federal Reserve members now have authority similar to that of bank holding companies based on amendments to the Federal Reserve Act passed in late 1992, and the Federal Reserve Board is currently developing regulatory guidelines that will govern the CDCs and community development investments of state-chartered bank.

I want to call the subcommittee's attention to two publications we have provided with our written statement.(1) The first is Community Development Investments, which describes in some detail the Federal Reserve's policies and guidelines for bank holding company CDCs and community development project investments and also outlines key issues that holding companies should address when considering such investments. Although I will touch briefly on some of these guidelines and issues today, those who are interested in additional detail should consult the publication. The second publication is Directory: Bank Holding Company Community Development Investment, which includes profiles that describe the CDCs and other community development projects in which bank holding companies have invested.

In my remarks today I begin by discussing CDCs in the context of banking's overall role in financing community development. Second, I will provide the subcommittee with some background on the Federal Reserve's policies and guidelines for bank holding company CDCs and community development investments. Finally, I will share with you some observations about key ways in which the equity investment option is being used around the country and some of the more common misperceptions about bank-related CDCs.

As you know, interest in banking's overall role in financing community development is increasing in banks and their communities. Those seeking funds for low-income housing projects, small and minority revitalization efforts have increasingly looked to banks as the primary source of financing. Because of their expertise in finance, their local presence, and their community reinvestment obligations, financial institutions are viewed as natural partners in the community development process by housing groups, community organizations, small business, neighborhood development groups, and city and county governments, as well as private developers.

Over the past five years, in particular, we have observed significant growth of bank financing for community development in both large and small communities throughout the country. Some of that growth has been reflected in the increasing use of community development corporations and investments by banks and bank holding companies.

The Role of Banks in Community

Development

I want to make clear at the outset, however, that although CDCs and community development investments remain important tools for banks and bank holding companies, they are, in fact, only one part of a much larger picture. Despite the significant growth in the number of bank-related CDCs and the expanding scope of their activities, the primary way in which financial institutions support community development programs and projects continues to be in the more traditional form of loans. These loans may include direct loans or loan participations, involvement in special housing or small business lending consortium organizations, the offering of credit lines to other community development lenders, or the purchase of loans and other common forms of debt securities to help meet the credit needs of a bank's community. Often these loans are provided through collaborative public-private partnerships. …