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A New Model For CRA
In New York State, we now have the opportunity to begin to reshape the
government's role relative to the Community Reinvestment Act.
During Gov. George Pataki's campaign, he was quoted as saying that part of
his economic message to New York City was that a commercial bank should be
established in Harlem in order to recycle local deposits into local loans
and opportunity. Although this promise is based primarily upon economic
considerations, the nexus between CRA and a locally owned bank is that such
a bank offers the best form of community reinvestment.
A bank that draws its deposits locally and has a CRA-mandated local service
area must grant local loans. The process ensures the bank's and the
community's success. The opportunity that the new governor has is to
leverage the state's power to create well-run, profitable community banks in
economically challenged areas. Although large metropolitan banks and
thrifts must be part of the solution, trying to force branches of these
institutions to have the local feel and character of a neighbor just not
working as the original CRA intended. Let's look - at what needs to be done.
A two-pronged strategy must be employed. Nationally, the CRA must be
rewritten to address the responsibilities of financial institutions or
branches in non-urban, non-distressed areas. In these areas, CRA should
concern itself primarily with total reinvestment into a service area. That
is to say, a bank's reinvestment responsibilities should be to recycle its
local deposits into local loans, at an acceptable level, with sensitivity to
special or flexible underwriting standards. In addition, the bank should
demonstrate social and philanthropic leadership.
In distressed areas, CRA should recognize the important role of a hybrid
commercial bank and encourage a partnership between existing financial
institutions, the new bank and the regulators. Bankers are frustrated by
how best to serve distressed areas and should welcome the opportunity to
support an institution that can establish a better nexus with the
neighborhood. Some features of this new bank would be:
* A fast-track regulatory approval process to charter the bank.
* A reduced initial capital contribution to get it started.
* A special stock offering priced - to allow local ownership - for example,
50 cents a share.
* Once the bank is chartered and FDIC insurance is granted, the state would
deposit $25 million to $50 million, at market CD rates, to give the bank the
cash flow to break even.
* CRA credit would be granted for any financial institution that either
invested in stock or deposited money in the bank for a specified period of
* The bank's management would reflect the ethnic diversity of the service
area, and there would be mandatory mentoring programs by other banks to
help establish and build its operations.
* A tax plan that would include a local exemption and a state income tax
exemption until the bank is profitable and well-capitalized.
* A regulatory plan that would exempt the bank from more onerous
state-controlled regulations for the first few years. This exemption would
not include safety and soundness regulations, however
* Certain limitations, such as geography, would be established so that
taxpaying institutions would not be adversely affected by this special
These are just some of the possible features. The most important one is the
local owner/depositor relationship, which will help ensure the bank's
success. This new institution would be established with little state
fiscal impact and no additional regulatory burden.
Minority ownership of a local bank will not solve all of today's
reinvestment problems, but it will provide the best delivery system with
the greatest chance of economic vibrancy and opportunity for distressed
communities. In 1993, I wrote that "to recast the banking industry as the
industry to cure social and economic inconsistencies alone would be a
misplaced reliance on only a small percentage of the population able to
We need to help to reinvest in our communities. We need different
thinking. Perhaps New York can lead the way.
by John I. Pritchard
US Banker Apr, 1995
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