The Industry Should Fund Community Development Banks
Mannion, Robert E., American Banker
In recent discussions about President Clinton's idea for a network of community development banks, some commentators have proposed that the nation's financial institutions - not the government - provide the necessary capital.
Some community activists have opposed this approach, arguing that it will simply give financial institutions a chance to buy their way out of their Community Reinvestment Act obligations.
Notwithstanding these criticisms, the notion makes sense.
First, it would not require federal spending - an important consideration with the deficit looming as a major issue.
Second, there would be no need for specific congressional authorization, which might be difficult to obtain quickly. The administration could implement the program quickly through a system of nationally chartered special-purpose banks.
There would be nothing revolutionary about this approach. Limited-purpose national banks are not a new idea. Such institutions have been set up by bank holding companies to engage in credit card and trust activities for a number of years. Retailers such as J.C. Penney Co. and Nordstrom Inc. have established limited-purpose banks.
Who would own community development institutions? Bank holding companies could become shareholders as part of a cooperative effort to address the banking needs of their low- and moderate-income communities.
Ten bank holding companies, each providing $1 million in capital, would mean $10 million of capital for a community development bank. This could support more than $120 million in assets.
Bank holding companies would welcome the idea, provided that their participation received adequate credit from regulators for purposes of reinvestment-act compliance.
The community development bank shareholders should also participate actively in the operations of these banks by providing personnel, on a permanent or rotating basis, as well as other assistance like data processing marketing, product development, auditing, and internal controls.
Holding companies that are not shareholders of the community development bank, as well as banks and thrifts, would be able to get reinvestment-act credit by placing deposits in that entity.
One of the major difficulties that many bankers perceive in the act is the subjectivity of the examination process. Try as the regulators may in policy statements and speeches, bankers are still perplexed about what will satisfy the act's requirements.
The Needs Are Clear
Another problem with the existing structure is that we have institutions falling all over themselves trying to "ascertain the credit needs of the community." In fact, it is generally known that the needs of low-income and moderate-income neighborhoods include low-cost checking home mortgage and improvement loans, and small-business loans.
Funds spent to justify and document existing programs could be better used as investments or deposits in a community development bank. …