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CDFIs Should be Ready for Growth

Adam Rust's picture

Posted July 22, 2009

Community Development Financial Institutions (CDFI) may be challenged by the riches in the near future. On Sept. 22nd, 2008, Goldman Sachs was converted to a bank holding company by the Federal Reserve.  Morgan Stanley has gone through the same process. The Federal Reserve's intention was to be able to shore up the capitalization of these firms through its TARP program.

As banks, though, GS and MS are suddenly under the regulatory scope of the same forces that govern other banks.  This includes the examination under the Community Reinvestment Act.

These firms have undergone some scrutity for the CRA in the past.  They have each fared well.  Goldman Bank

and Morgan Stanley Bank, subsidiaries of their larger partners, have been examined in the past. In 2006, Goldman Bank received a satisfactory.  Goldman Bank is an industrial bank chartered in Utah.  Morgan Stanley Bank, a wholesale limited purpose bank, received the same grade during its most recent exam.

However, the possibility that each would have their entire operations subject to CRA would change the CDFI field dramatically.  Huge sums would suddenly be directed toward community capitalism.  While that would be good for communities and probably good for the CDFI industry, it may not be that simple.  That is because most CDFIs are relatively small.  Many make only a few mortgage loans and some small business loans in any given year.

As one bank analyst put, Goldman is not interested in looking for ways to make small loans to Korean bodegas.   That sets up the likely scenario where GS and MS suddenly seek intermediaries for the community investments.  They need to invest the money in sound and suitable enterprises, but it is hardly cost-efficient for these huge banks to do the underwriting on a loan-by-loan basis.

The CDFI industry has at best only a few institutions that can act as intermediaries for these firms.  ShoreBank, Self-Help, and NeighborWorks are all very large and all very capable.  Each already has its own credit union to receive investments, and substantial staff and networks to attract deals across the country.  They will flourish in this new environment.

What is missing, though, may be more middle and large-sized intermediary institutions.  More, because that will translate into better competition among the CDFIs.  As well, there is a place for state-level CDFIs.  In North Carolina, CICNC distributes CRA investments to a large group of non-profit developers and community development institutions.

The scale will change things dramatically.  It represents a huge opportunity for the community capital sector, but also a challenge for redefinition and restructuring among its constituents.