Study Says Banks Big Boost To CDCUs

Register now

Banks and thrifts help boost the capabilities of community development credit unions with investments to the tune of millions of dollars under the Community Reinvestment Act, according to a new study issued last week by the Woodstock Institute, a liberal think tank here.

The study, commissioned to help dissuade Congress from eliminating provisions in the CRA encouraging investments in community development financial institutions, found that of 193 CDCUs studied, less than half the nation's CDCUs, received $18.2-million in bank and thrift funding in 2000. Those funds helped raise those credit unions' net capital by about 1%, enabling them to offer expanded products and services, the Woodstock Institute found.

On a broader scale, the 379 CDFIs studied, including community development banks, loan funds, venture capital funds, microenterprise lenders and credit unions, received $847 million in bank and thrift funding through the CRA. That amounts to 15% of the capital for those institutions.

"CDFIs are started in a variety of ways with different sources of funding," said the study. "However, they rely heavily on investments from regular banks and thrift institutions for loans and investments. These loans and investments are made partly because of certain financial institutions' responsibilities under the Community Reinvestment Act."

Clifford Rosenthal, executive director of the National Federation of CDCUs, whose members made up most of the Woodstock study's credit union sample, acknowledged the important role played by banks' CRA pledges for community development credit unions. "I suspect it's been important. We have a number of credit unions in the New York City area that have benefited from bank support over the last decade. For some of them it has made a huge difference," he said.

$27 Million In Funding

The infusion of bank and thrift funding, most of it as non-member deposits, has enabled many CDCUs to expand their services, as well as access to other capital sources, said Rosenthal. He estimated that the Federation's 193 credit unions have received $27 million in bank and thrift CRA funds directly, and millions more from funds provided through intermediaries, such as the Federation. A 1996 $1.25-million grant from Citicorp to the Federation, for example, allowed the Federation to make 35 equity grants in CDCUs.

"The growth in equity and the growth in net worth in some of these credit unions is associated with very strong financial performance," said Rosenthal. "These infusions mean a great deal to CDCUs in many markets."

The Woodstock Institute conducted the study to illustrate the importance of the investment test portion of CRA examinations to Congress, which is currently studying eliminating the test. The test, asserts Woodstock, is an important inducement to banks and thrifts to make CRA investments in credit unions and other CDFIs.

"Without a separate investment test in the large bak portion of CRA exams, both regulators and financial institutions are likely to place less emphasis on this critical source of funds for CDFIs," Woodstock said. "This would be a huge loss to communities around the country, as CDFIs are at the forefront of community development activities in distressed areas nationwide."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER