Banking Bill Plays Down Creation of New Banks

WHEN President Clinton signs the community development bank bill now on his desk, it will mark a quiet victory for an administration that has not had many lately. The bill will also reinforce a move to smaller, more flexible lending institutions in distressed communities.

During his presidential campaign, Mr. Clinton promised to set up 100 community development banks with a mandate to lend to urban and rural areas that had been abandoned by traditional banks. He cited as models Chicago's South Shore Bank, which has had a community development mission since 1973, and the Southern Development Bancorporation in Arkansas.

The president proposed new banks because he wanted ``to empower existing people in communities who were doing things right,'' says a senior White House official. ``There was a sense of wanting to create something from scratch.''

Since the establishment of the South Shore Bank, there has been ``tremendous growth in the capacity of local initiative support and local partnerships,'' says Rollin Anglun of the Ford Foundation in New York.

Such so-called community development financial institutions (CDFIs) often combine an insured depository institution with one or more nonprofit affiliates to provide technical support or additional equity to underfinanced communities.

Passed by the Congress last week, the bill plays down the creation of new banks. Instead, it sets up a $382 million fund to provide matching grants to any qualifying institution, including existing banks, credit unions, and associations. One third of the $382 million is earmarked to fund the Bank Enterprise Act, which gives financial incentives to banks that aggressively lend in low-income communities.

Sweetener for banks

Bankers who initially opposed the bill were brought on board by the administration's shift away from creating 100 new banks as well as by new reductions in regulation. Provisions cutting paperwork associated with currency transaction reports, for example, are expected to save the industry $40 million a year.

``The CDFI bill had a little something for every segment of the banking industry,'' says Ken Guenther, executive vice president of the Independent Bankers Association of America. ``The bill rolls back for the first time in 15 years the ever-increasing burden of government regulation. This sweetener brought the banking lobby solidly behind the bill.''

His organization, he adds, had ``severe problems'' with the administration's original concept of 100 new banks. ``Without regulatory relief, we wouldn't have backed the bill.''Community activists hail the bill, even in its reduced form. ``It's a credit to the administration and to Congress to design a program people can get behind,'' says Mark Pinsky, coordinator of the Coalition of Community Development Financial Institutions in Morrisville, Pa. If the new fund is fully funded, ``it's a chance to do something exciting and innovative.''

Fledgling industry

Mr. Pinsky and other activists describe themselves not as a lobby group for community development but as a new industry.

``We didn't think of ourselves as an industry until a year ago,'' Pinsky says. ``CDFIs now manage about $1 billion. Our combined loan-loss rate is 1 percent, about that of an average bank.... We have a narrow and clearly defined market niche. We are willing to reduce rate of return in exchange for social return. We attract below-market-rate funds into our institutions and operate with very little margin.''

The first comprehensive analysis of CDFIs was done by the Chicago-based Woodstock Institute in 1989 for the Ford Foundation. Former Woodstock president Jean Pogge, now an official with the South Shore Bank, insists that public support is critical for many of these fledgling ventures to survive.

``The greatest barrier to the expansion of CDFIs was equity capital,'' she says. ``We began pushing for a public sector solution to this need for capital. It was clear that without public-sector support, their capacity would never be realized.''

New groups in Baltimore, Cleveland, Oakland, Calif., and Washington, are developing CDFIs in anticipation of federal legislation and new public-sector support.

``We were very aware of leadership at the national level and believed that was a real opportunity in the District - and a need,'' says John Hamilton, a founder of Community First Inc., a Washington-based nonprofit group committed to ``reinvesting local resources and establishing a CDFI in D.C. Five years ago, a similar project was proposed and failed, he said, because of the lack of federal support.

Even with more federal aid, some analysts are cautious about how far CDFIs can develop - or how far this bill can take them.

``Micro-lending models are well tested in international markets, but here in the United States they're just getting off the ground,'' says Richard Walker, community affairs officer for the Federal Reserve Bank of Boston. ``The bill provides some additional flexibility, some additional capital for existing institutions, but on the whole it's not a lot of money.''