COMMENTARY: Shorebank and the Future of CDFIs
The decline and demise of Shorebank is sad, traumatic for some, and important. As Richard Taub explains, Shorebank closed due to a toxic mix of macroeconomic conditions compounded by governance and management decisions.
It turns out, however, that the community development financial institution (CDFI) industry is stronger than ever and its future — both short-term and long-term — seems bright. The story here is CDFI resilience rather than industry decline.
What Shorebank’s end highlighted was a set of differences that are apparent only when you peel back the CDFI label and look underneath.
Depository 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.
Nondepository CDFIs — notably CDFI loan funds — are thriving as lenders. Anchored by strong capital positions (capital ratios routinely north of 15%), they were able to act conservatively early in the credit crisis, writing off questionable loans and marking to market. Their balance sheets could handle it. Some key measures of portfolio quality (charge offs and portfolio at risk) deteriorated in late 2008 but stabilized quickly. Net charge offs for 2008 and 2009 stayed low — below 3%.
New investment into CDFIs increased sharply in 2010. For depository CDFIs, a TARP subprogram, the Community Development Capital Initiative, provided $570 million in new capital on favorable terms. For CDFI loan funds, banks and government have committed more than $1.5 billion in new debt. The CDFI Fund, a unique federal resource, continues to gain support and increased funding. Other federal programs are increasingly interested in CDFIs.
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.
Mark Pinsky is President & CEO of Opportunity Finance Network, the national CDFI network.
This article appeared in the inaugural issue of The Journal of the Institute for Comprehensive Community Development, December 2010. Download the full issue.
Posted in Journal Inaugural Issue: December 2010, Affordable Housing