Full text of Banking and Community Perspectives (Federal Reserve Bank of Dallas) : July 1995

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SPECIAL ISSUE

P

BANKING & COMMUNITY

.

FEDERAL RESERVE BANK OF DALLAS

JULY 1995

erspectives
I am very pleased to be here

Positive
Partnerships

today as part of your honoring some of
the people who have had the courage
and determination to make a difference
in our country’s neighborhoods. These
changes were made in the spirit of
partnership—that is, partnerships

In a speech given at the Social

between community-based nonprofit
Compact Awards luncheon in

organizations, local entrepreneurs
and financial institutions. But some-

Washington, D.C., on May 17, 1995,

thing more fundamental was behind
Federal Reserve Chairman Alan
Greenspan discussed successful com munity and economic development
partnerships between communitybased organizations and financial insti tutions. We wanted to share with you
these remarks, which also highlight the
new CRA regulation and underscore
the need to strive continuously to
eliminate lending discrimination.

these successes.

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The people here today have
demonstrated unusual vision and creativity. In neighborhoods where most
people saw blight and decay, they saw
opportunities. They brought together
the resources necessary to make
things happen—often in nontraditional
ways. These entrepreneurs had to seek
out the capital to make their vision a
reality. Like any venture capitalist, they
had to sell their investors on their
vision. They had to overcome the
bureaucratic hurdles that federal, state
and local governments threw in their
paths. And finally, and often the most
difficult task, they had to sell their customers on their product. They had to
convince people who had abandoned

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enriched lives in so many communities.
In Rancho Vista, for example, the
entrepreneurial vision of our honorees
led to a new way of financing prenatal
care. As a result, low- and moderateincome people who lacked health
insurance coverage can now obtain
prenatal care that they could not otherwise afford.
On the other side of the country, in

hope for the neighborhoods they called

New Jersey, barrier-free housing for the

home that things could get better.

disabled and those with special needs

Having this vision to recognize

filled a unique market niche at sub-

gaps in the market and then fill them is

stantially lower cost than the public

what makes new products possible.

sector has been able to attain through

And it is the emergence of new prod-

traditional care facilities. We are all bet-

ucts to fill unmet needs that has so

ter off for these efforts, whether we are
(continued on page 2)

S

peech

(continued from page 1)

the direct consumers of them or the
taxpayers who would otherwise shoulder the costs.
I would particularly like to commend the partners from the financial
services industry who are here today.
They are, of course, a crucial player in
community revitalization. To put forward
their resources and their energy to the
extent they have, they must share the
vision of the entrepreneurs with whom

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sion they are undertaking. While today
the Social Compact is honoring the
particular efforts of one financial institution—Nat West—the Neighborhood
Housing Services of New York has
managed to partner with no fewer than
180 financial institutions. In Rochester,
the partnership between First Federal
and the North East Block Club has
successfully combined the best of
what each has to offer into one deal:

“It is a natural part of the enlightened selfinterest of any organization to be concerned
with the community in which it has invested
and for it to want to improve the quality of life
its employees live.”

they are working. They are taking
risks, but they recognize that as part
of their mission.
The history of financial involvement
in increasing homeownership in
America is one of taking risks—of
designing new instruments and financial products to make financial
resources prudently available so that
more people can realize the goal of
homeownership. Taking prudent risks
in lending so that others may attain an
objective is the essential role of a
financial intermediary.
Our New York honorees give an
idea of the extent of partnership that is
possible and the complexity of the mis-

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community skills, financial resources
and vision.
The institutions represented here
today are most active in the communities in which they do business, and
they know that helping in the rehabilitation effort also preserves their own
environment. One can easily see the
River Bend area of Des Moines from
the Principal Financial Group’s building
downtown. The historic sections of
Savannah now being rehabilitated are
only a short walk from Wachovia’s
downtown office. It is a natural part of
the enlightened self-interest of any
organization to be concerned with the
community in which it has invested and

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for it to want to improve the quality of
life its employees live.
We have long recognized the
importance of self-interest in promoting
the well-being of all. Most of the parks,
libraries and institutions of higher education in America’s cities were founded
by local businesspersons wanting to
improve the local quality of life. Many
of the gifts that started these institutions were given long before charitable
giving received a tax deduction—in
fact, long before there even was an
income tax. While there may be no
obvious short-term profit motive
involved in these gifts, maximizing the
long-term franchise values of business
enterprise requires an institution to recognize that it is a part of the community in which it operates. Having a high
quality of life in that community may
allow the firm to attract employees from
other areas or maintain the morale of
current employees.
Edmund Burke noted the “little
brigades” of individuals who banded
together in voluntary association to
provide the basic social infrastructure
that allows society to operate. So,
today we are celebrating the achievements of partnerships of people who
made things happen in their communities. We are celebrating the increase in
material opportunity and the capacity
for families of modest means to take
their first step on the ladder of economic
opportunity. Let us bear in mind and
pay tribute to the virtues of a system
that made today possible—partnership,
vision and enlightened self-interest.

3

“CRA has helped financial institutions to
discover new markets that may have been
underserved before.”
CRA Reform
These same three factors have
been in regulators’ minds during the
recent regulatory reform process for
the Community Reinvestment Act.
Preparing the new regulation has been
a very difficult task. Various facets had
to be carefully weighed and balanced.
First was the president’s request that
the agencies produce a more objective
system that would include less process
and paperwork burden for the financial
industry and produce greater results
for the community. There was the community’s increased need for access to
credit in all areas, including low- and
moderate-income neighborhoods, and
the needs of the financial industry to
make safe, sound and profitable loans.
Additionally, the regulators had to
walk that fine line between trying to
ensure credit availability without falling
into the trap of credit allocation. In
essence, there was a partnership of
interest in accommodating all these
goals in the revised rules.
The new CRA regulation is surely
not perfect, but it probably is the best
that we could do given all the competing considerations. When conducted
properly by banks that are knowledgeable about their local markets, that use
this knowledge to develop suitable
products and have adequately promot-

ed those products to the low- and

cessful programs involve credit counseling and other activities that add to
cost, and whether they are fully recovered is unclear. But on the broader

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question, there is little or no evidence
that banks’ safety and soundness have

been compromised, and often bankers
.
moderate-income
segments
of
the
report sound business opportunities.
.
community,
CRA
can
be
a
safe,
sound
We at the Federal Reserve have
.
. and profitable business. This seems to
stressed this market aspect of CRA in
. have been proven over the years of
the past and will continue to do so in
. our experience since the law was
the implementation of the new regula. enacted in 1977. CRA has helped
tion. I think this is crucial. If CRA is
.
financial
institutions
to
discover
new
perceived by banks as a tax or credit
.
markets
that
may
have
been
underallocation, it will fail in the long run.
.
. served before.
Activities developed by banks to
.
But what about the question of
meet credit needs in low- and moder. whether loans to low- and moderateate-income neighborhoods should be
. income borrowers have caused safety
well planned and thoughtfully imple.
and
soundness
problems?
To
date
mented within banks’ overall business
.
there
is
very
little
hard
data.
A
few
plan. Banks should not try to throw
.
. studies suggest that the delinquency
money at a problem or “just write the
. experience is not materially different.
check”: that’s not to anyone’s advan. Beyond that, anecdotal information
tage. The latter type of activity will not
. seems to suggest that loans to lowbe sustainable over the long haul.
.
and
moderate-income
people
perform
Banks are not philanthropic institutions.
.
with
respect
to
repayment
as
well
as,
They are for-profit entities with obliga.
. and in some cases better than, loans
tions to their stockholders, who require
. to others, though default rates of some
competitive rates of return, and are
. mortgage loans may be higher. Aside
subject to a regulatory apparatus that
. from the issue of repayment, there is
protects their depositors from losses
.
the
issue
of
profitability.
The
more
sucowing
to unsound practices.
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“There is little or no evidence that banks’
.
. safety and soundness have been compromised,
.
. and often bankers report sound business
. opportunities.”
(continued on page 4)

(continued from page 3)

This is surely evident to everyone,
and I apologize for emphasizing what
may seem to be obvious. But I think it
bears repeating, for CRA must meet
the test of the market if it is to provide
the long-term benefits of revitalization
that we all desire. It’s worth reminding
all of us—community groups, policymakers and even bankers—of this
fact from time to time, since it’s some-

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underserving some of the unique and
critical needs of localities. I don’t think
you’ll find any argument on this point
from any of the agencies, but it will be
important for all of us, in implementing
the new regulation, to remain alert to
the risk of de facto credit allocation
that is not sanctioned by Congress, at
the same time we are disavowing any
such intention.

“To be sure, much discrimination, perhaps
most, in today’s society is subconscious, the
result of habit and culture. But whether it is
deliberate or not, the consequence is the same.”
times tempting to emphasize shortterm benefits at the expense of longterm commitments.
CRA has had a unique strength in
that it has not been a bureaucratic,
Washington-driven program that substitutes “inside the Beltway” decisionmaking by nonelected officials for the
give and take of local community control. Yet in recent years, it has seemed
clear that some greater direction from
the regulators was needed, and we
have tried to provide that guidance in
the new regulation. But in doing so, we
must be vigilant to avoid turning a flexible, locally determined program into a
“one size fits all” approach.
This was one of the most difficult
issues that we tackled in the revision
process—trying to maintain some flexibility, yet further quantifying what is
required for good performance.
Centrally directed credit allocation by
administrative agencies would interfere with the flow of credit and runs the
great risk of misallocating funds and

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This brings me to the issue of
implementation of the new regulation.
In a sense the work is just beginning.
There will be difficult steps in developing training for the agencies, lenders
and community groups and in successfully implementing the new rules.
We are committed to do this on an
interagency basis to ensure maximum
consistency both within and among the
various regulatory agencies in the
examination process. Since much of
this will be new to everyone, we will be
looking for, and paying close attention
to, feedback from the lenders, community organizations and other interested
parties on our progress. With everyone
working together, we think that this will
continue to be important to sound
community development.
Discrimination
Before closing, I would like to turn
briefly to a matter of serious concern to
us all that is distinct from community
development, but not unrelated. That is

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racial discrimination, whose specter
has been at the roots of much effort at
enhanced community development.
To be sure, much discrimination,
perhaps most, in today’s society is
subconscious, the result of habit and
culture. But whether it is deliberate or
not, the consequence is the same.
Free market capitalistic systems, rooted in individual freedom, cannot and
should not abide such unjust behavior.
To the extent that individual contributions to the marketplace are judged
and rewarded on any basis other than
economic values, the system suffers
and the nation’s standard of living is
impaired. We may never reach perfection in this regard, but we should
never cease to persevere in this important matter.
It has been a great pleasure to be
with you today. I am sure that as long
as organizations such as yours exist,
there will be imaginative, creative and
worthwhile projects that contribute to
making our neighborhoods safer and
better places to live.

Perspectives
Federal Reserve Bank of Dallas
Community Affairs Office
P.O. Box 655906
Dallas, Texas 75265-5906
Gloria Vasquez Brown
Community Affairs Officer
Nancy C. Vickrey
Community Affairs Manager
Ariel D. Cisneros
Community Affairs Specialist
Jim V. Foster
Community Affairs Specialist
Bobbie K. Salgado
Houston Branch
Community Affairs Specialist
The views expressed are those
of the authors and should not be
attributed to the Federal Reserve Bank of Dallas
or the Federal Reserve System.
Articles may be reprinted on the condition
that the source is credited
and a copy is provided to
the Community Affairs Office.