The Shorebank Corp.. a Chicago bank holding company. and its cousin. the Southern Development Bancorporation of Arkadelphia. Ark.. were cited often in the campaign by President-elect Clinton as models for community development initiatives. He has called for creation of such banks in 100 communities around the country. George Surgeon. president and chief executive officer of Southern. was interviewed by The Mortgage Marketplace about the nature of community development banking and what the federal government should do W encourage it.
MMP: What distinguishes a community development bank from other financial institutions?
GS: Three things. The primary mission is to catalyze community economic development that benefits low- and moderate-income people in a discrete geographic area. The primary service area for a community development bank would be in an area that could be described as distressed. Finally, the shareholder group of a community development bank would be willing to sacrifice return on equity in the early years to absorb the extraordinary cost of a community development program.
MMP: How does community development banking differ from the kinds of activities the Community Reinvestment Act was designed to foster?
GS: Community development banks are meant to be on the cutting edge. Through their non-profit. grant supported development affiliates. they can take risks conventional banks cannot. By doing so. they make nonbankable deals bankable. One of the aspects of our program that 1 am most pleased with is our ability to work well with other financial institutions in helping them meet their CRA responsibilities. For example, our real estate CDC subsidiary has financed all of its development projects through unaffiliated banks; so far. six different banks have been involved in these projects.
MMP: What action is needed by the federal government to promote community development banking?
GS: The most helpful action that the federal government could take would be to make plain-vanilla equity capital available for community development banks on a matching basis. In the 1930s. banks were able to apply for preferred stock investments from the federal government. Recently. Shorebank negotiated a $3 million market rate 10-year loan from the state of Michigan to open up a business industrial development company in the Upper. Peninsula. The interest and principal on this loan. however. will be forgiven if Shorebank meets certain Job creation goals. That could be part of a federal community development bank program--straight equity investments in development banks. Assistance in the form of investments. loans or grants could also be made available directly to the community development subsidiaries and affiliates of development bank holding companies.
MMP: How would you keep such a program from becoming Just another way of handing out pork to communities lucky enough to be represented by powerful politicians?
GS: Keeping the pork barrel out of such a program would be very difficult. The board that oversees whatever money is made available would have to be beyond reproach. I have suggested that the chairman of the Federal Reserve Board head the effort.
MMP: Is there enough talent around the country to operate 100 of these banks?
GS: I think there is. I think the last 25 years have shown how flexible and creative the banking industry can be in addressing change. I have personally seen a lot of change in the community development lending area. The American Bankers Association has a community development subcommittee. People on that panel are not only committed to community development. they are also very good bankers.
MMP: What sets a community development bank apart?
GS: I think it's the attitude that we can make things happen in distressed areas by using the sometimes unrecognized entrepreneurial skills of the area's people to help them produce economic development.
MMP: How would this government assistance be different from many of the programs tried in the past, including those in President Johnson's War on Poverty?
GS: It's accountability. We're a business and our shareholders and our regulators require us to succeed. When the FDIC comes around. I assure you it doesn't have a different rule book for us.
MMP: What priorities would you suggest to a czar of community development?
GS: You've got to make the institutions accountable. I would also stress the importance of equity. One of the provisions in the housing bill signed recently by President Bush is an $85 million model program for community development banks. Earlier versions of the bill called for equity investments in development banks. In the final version, this was watered down to long-term, market rate debt. though non-profit affiliates could apply for grants or forgivable loans. I think that was a mistake and I would change it if I could. I would also make sure the czar, Congress and the president understand that community development is only one part of the solution for solving the economic problems of the country and that it is a long-term process. Also, the program shouldn't be burdened by too much regulation. This kind of program does not respond well to command and control from afar. If we have enjoyed any success it's because our corporate structure has been so flexible and our shareholders have given us so much latitude to experiment. When things don't work. we stop doing them and change the program. We don't call Washington for guidance.
MMP: Any other warnings for the czar? C.S: Don't look for mediate results. It takes two, three or four years to get programs in place and you start producing housing units and Jobs.
MMP: Has this made much difference in the economies of the communities served
GS: There are independent studies of what Shorebank has done that evidence dramatic impacts on the communities it serves: housing prices. Job creation, job readiness of the local labor force. The proof is in the pudding. There is currently tremendous market demand for Shorebank's assistance from all across the country to establish community development banks. If community development banking wasn't working. no one would want it for their neighborhood.