Why would a high-profile group of Wall Street titans and the biggest money-center banks and financiers in the world give Chicago's tiny ShoreBank the time of day — let alone a $140 million investment?
By banking industry standards, ShoreBank has a modest $2.2 billion in total assets — practically a rounding error on the balance sheet of a money-center bank. The bank's nondescript headquarters building on the corner of 71st and South Jeffery Boulevard blends into the gray of Chicago's working-class South Shore neighborhood.
Motivating the big investment is the fact that ShoreBank is a historically and symbolically important institution in the world of community development lending. Founded nearly 40 years ago, it was among a handful of pioneering mission-based financial institutions that set out to defy then-conventional wisdom that low- and modest-income people were not creditworthy.
In the past four decades, ShoreBank alongside its grassroots colleagues in the community development credit union, loan fund and venture capital sectors debunked the long-held banking industry myth that lending to redlined neighborhoods, low-income individuals and people of color was unsafe and unsound.
To the contrary, they proved that community development lending was not just safe and sound but also good business. Over the years, many product innovations and strategies for managing risk developed by these community development financial institutions, or CDFIs, have been replicated at the big banks.
CDFIs are of crucial national importance because of the communities they serve. They choose to work in places ignored by other financial institutions, including disinvested urban neighborhoods, remote rural regions, and Indian reservations. CDFIs focus on making a difference in the lives of tens of thousands of people. In many cases, they are their only source of credit and financial services.
This lending has a ripple effect throughout the community far beyond a CDFI's direct customers. Today the vibrant and robust 800-plus CDFI industry works in every state with a core underlying value of always providing fair, affordable and responsible credit that builds borrowers and communities — rather than stripping wealth or making a quick buck.
Yet as with all financial institutions in this recession, CDFIs have had to contend with delinquencies and the resultant institutional stress. In ShoreBank's case, the problem was worsened because a "perfect storm" rolled in — a financial market crash, the Great Recession and the fact that the bank operates in a state particularly hard hit by the downturn. (Illinois accounts for 14% of all U.S. bank failures since 2008.)
It is crucial, however, to note that the vast, vast majority of CDFIs are financially strong and resilient and actively lending in their communities. They are committed to bringing jobs, housing and economic activity to places that have borne a disproportionate share of the recession's burden.
Despite decades-long progress in advancing community development finance, if a CDFI disappears from a community, it is not a foregone conclusion that a responsible lender will come in to take its place. The work is hard, and the financial returns are modest.
In these harsh economic times, CDFIs need to be preserved and promoted — which is why the Obama administration announced the creation of the Community Development Capital Initiative in February. Employing unused Tarp funds, the initiative provides affordable, patient capital to CDFI banks and credit unions to spark economic activity today and ensure these mission-focused depositories can serve future generations. Discussions are ongoing with the Treasury Department to find ways to preserve and support equally crucial nondepository CDFIs.
So why would the Wall Street titans and biggest money-center banks invest in a CDFI? Among the investor groups infusing capital into ShoreBank, most already have a history of supporting or partnering with CDFIs to reach new and emerging markets. They should be lauded for investing in the iconic ShoreBank but not rest on their laurels. The 800-plus other CDFIs working in underserved communities also need capital and could put it to work immediately. ShoreBank, like all CDFIs, is important because it is there in good times and bad for ordinary working people who want to expand a small business, renovate a house or just cash a check without being ripped off.