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Community development banks: salvation for local development?

During the 1992 campaign season, President Clinton gave high praise and drew national attention to South Shore Bank, a small development bank which restored hope to a once disillusioned community on the out-skirts of Chicago. And, in his February budget plan, the president proposed spending $394 million over the next four years to foster 100 community development banks, to be based on the South Shore model.

How feasible is his proposal and would it, if approved, spur the kind of lending and investment which could provide housing and economic development to our cities?

Stumbling Blocks

The evolution and eventual success of South Shore Bank, was years in the making. Ronald Grzywinski, one of the bank's founders (in 1973) and chairman of its holding company, Shorebank Corporation, believes that the special expertise required to staff a network of 100 such banks just doesn't exist today. He also believes that after years of neglect some communities are beyond the power of any bank to restore and is skeptical about government being anything but a supportive player in the process of establishing more community development banks.

In an April issue of Crain's Chicago Business, the newspaper called Grzywinski's response to questions about Clinton's plan, "low-key and politically neutral." According to the article, Grzywinski said, "It's the president's idea, not ours." Although in a 1991 Harvard Business Review article Grzywinski encourages others to follow their lead. He also cautions that the South Shore model won't work in all communities.

As a free-market advocate and entrepreneur, he recognizes that government can, and perhaps should, play a pivotal role in the creation of community development banks by providing more incentives to the private sector.

With the South Shore prototype as its model (and guided by Shorebank's advisory services subsidiary), Southern Development Bank, known as "Southern," was established in 1987.

The goal of Southern's philantropically-motivated owners (individuals, charitable foundations and business corporations) is to foster and accelerate the pace of economic development in a 32-county section of rural Arkansas. Quoted in a recent Washington Times article, George Surgeon, president of the Arkansas bank, reportedly said of the president's plan, "Whatever the final proposal, we're hoping they [the administration] won't forget those of us who have been toiling in the vineyard and gotten little support for the past 12 years."

Today, there are only about a dozen similar banks in operation or in some stage of planning. While across the country hundreds of small community development nonbank lenders make tiny loans to entrepreneurs in urban and rural areas, only about 25 to 30 of those institutions can effectively meet the credit needs of those communities for larger scale development. This combination of private and nonprofit institutions, as well as a number of innovative commercial bank initiatives, could provide the framework for President's Clinton's plan, but only in those communities where most of the local residents still have jobs.

Unfortunately, in a nation with 11,685 commercial banks and with interest rates at a 20-year low, access to credit remains a major obstacle to economic growth in most communities. Both commercial banks and their borrowers complain that this is due to the rising tide of mind-numbing and often overlapping regulations imposed by the numerous state and federal financial regulatory agencies. With a swelling chorus of "cut the red tape" and "reduce the overblown regulatory environment," there are hopeful signs that, at long last, Washington may be listening.

A Good Beginning

On March 30, acting on President Clinton's plan to ease credit access to small and medium businesses and farms, federal regulators jointly endorsed a new policy which allows strong banks and thrifts to make 20 percent of their total capital available (up to $900,000 per borrower) with relaxed documentation requirements. This policy effectively reinstates "character loans" (loans judged by regulators solely on their performance), to standard commercial banking practice.

Commenting on this new policy, a senior officer of Shorebank Corporation responded that "it will have no effect on their long-standing lending practices." Regulated by the Federal Deposit Insurance Corp., the Federal Reserve Board and the state bank examiner, South Shore Bank has made profits while making loans based on "all the collateral they can get, all standard financial analysis and on their own judgment of the capability, character and business plan of their borrowers."

And so we are left, in these deficit-driven, credit-hungry times, still searching for solutions and answers. Are more community development banks, or banks in general, part of our hope for a brighter future? Stay tuned.
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Author:Tiernan, Anne
Publication:Nation's Cities Weekly
Date:Jun 14, 1993
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