As the end of the year approaches, several thinkers around the Web are reflecting on the meaning of an event that deeply impacted the Chicago region and beyond: the closure of ShoreBank and its rebirth under a new management team as Urban Partnership Bank. We released a statement after ShoreBank’s closure commending the bank for playing a crucial role in supporting affordable housing in Chicago and expressing our hopes that Urban Partnership will carry on that legacy. Here’s what others are saying:
Journalist Tim Fernholz, the American Prospect:
Bankers in Chicago and elsewhere believe ShoreBank's failure was less because of its mission and more because of its business practices. The bank tried to accomplish too much, too fast, making expansion a priority above executive salaries (which stayed low compared to industry averages) and, critically, maintaining enough reserves. It was a single local bank supporting nearly two dozen affiliates that did everything from invest in Afghanistan to make home loans in Detroit. Ultimately, ShoreBank's excesses were very similar to those of banks with only one bottom line: imprudent addition of business lines that weren't well understood, rapid expansion without controlling for risk, and a lack of capital reserves for when times got tough. None of those practices are intrinsic to CDFIs; indeed, if those are the crimes for which critics indict CDFIs, then the entire financial system is guilty.
Professor Richard Taub, The Institute for Comprehensive Community Development:
The public at this point seems unwilling to valorize an organization like Shorebank that did, in fact, thrive for 35 years, making it possible for large numbers of people to buy homes, become landlords and, in some cases, start businesses.
Where does that leave community development banking today? Although under that umbrella lie very varied practices, a few things seem clear. To begin with, like the entire finance industry, practitioners will be forced to be more conservative. The standards for borrowers will be or have been raised. Many more potential borrowers are likely to have credit history problems because of foreclosures, and there will be less play in the system for those individuals. Lenders who made character loans or judgment calls on a person’s reliability in the past will be reluctant to do so. Similarly, with the increased level of equity capital required, as well as increased requirements for loan loss reserves, there will be fewer dollars available.
Opportunity Finance Network President & CEO Mark Pinsky, The Institute for Comprehensive Community Development:
Depository [community development financial institutions] CDFIs — banks and credit unions — experienced the challenges of reinvigorated regulatory oversight that disregarded the unique roles that CDFIs play. In short, they did not receive special treatment. Very likely, depository CDFIs will pull back on their lending to minimize capital risk, and that will hurt earnings. At the same time, however, their role as outlets for traditional banking services will grow. Conventional (non-CDFI) banks are likely to cede consumer banking opportunities to depository CDFIs and others….
What happened to Shorebank might have happened to any or many other CDFIs. But it didn’t. The end of Shorebank seems to be an exception, not the start of a trend.
Do you think that ShoreBank’s closure is the sign of a broader problem among community development financial institutions, or was it a one-time anomaly caused by overly ambitious business practices? What do you think community development banking will look like in the next decade? As Washington embarks on a mission of writing far-reaching financial regulations, do regulators need to make special considerations for CDFIs?