There's a joke making the rounds in Chicago that if BP and Toyota were serious about repairing their damaged reputations, they, too, would have helped bail out ShoreBank.

The community development bank was on the verge of failing in mid-May when some of the biggest-and most demonized-names on Wall Street pledged to rescue it. Combined, Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs and several other large firms committed an estimated $140 million to saving ShoreBank, earning themselves some much-needed positive PR.

The deal, which was still awaiting regulatory approval as this issue went to press, is not without controversy. Republican lawmakers immediately called for an investigation into why a $2.3 billion-asset bank headquartered in President Obama's hometown is being propped up when so many other banks have been allowed to fail.

The Obama administration denies any arm-twisting, but regardless, the real question critics should ask is whether shuttering ShoreBank was a better option. It could be argued that the bank deserves special attention because it serves the types of low- and moderate-income neighborhoods that, in truth, many banks ignore.

Still, if ShoreBank's missteps have taught us anything it's that banks whose assets are concentrated in risky community development loans should be treated differently than more conventional banks.

Some community development experts suggest, for example, that banks that lend primarily in the most vulnerable communities should be required to hold even more capital than banks with more diverse loan portfolios. Recessions hit these neighborhoods particularly hard, they argue, so it stands to reason that banks doing the bulk of their business in those markets be held to higher capital standards.

It's no coincidence that community development lenders that have voluntarily maintained higher capital levels—both banks and nonprofits—are weathering the current crisis better than their more highly leveraged counterparts.

Thicker capital cushions could give these banks more flexibility on loan workouts. Current rules don't really encourage forbearance because banks have to hold so much capital against troubled loans that often they are better off foreclosing on a property and unloading it at a loss. But one big reason why nonprofit lenders are reporting fewer defaults than banks these days is that they have more leeway to extend customers' repayment periods when times get tough.

There's a school of thought that says community development lending should be left to nonprofits and large banks that can better absorb the losses. That seems shortsighted. Large banks are doing an admirable job of investing in low-income communities, but it's still a side business for them. Nonprofits, meanwhile, have to rely on voluntary contributions for funding, and foundation money can dry up quickly in a recession.

Small, deposit-taking community development banks play an important role in reviving distressed neighborhoods. It's hardly guaranteed that if they disappeared, others would pick up the slack. Tougher capital standards might crimp their profits, but could ultimately help ensure their longevity.

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