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COMMENTARY: After Shorebank

In August 2010 Shorebank, the nation’s first community development bank, failed after thirty-plus years of operation. After the state of Illinois closed the bank, the FDIC sold its deposits and most of its $2.16 billion assets to Urban Partnership Bank, a newly created bank that pledged to continue serving Chicago’s low- to moderate-income communities. Richard Taub, who served as an advisor to the Shorebank board of directors, reflects on Shorebank’s passing.  Read a related commentary by Mark Pinsky.

The shutting down of South Shore Bank as we know it is one of those game-changing events whose consequences will reverberate in unpredictable ways for some time.  

From 1973 to 2008, South Shore Bank (aka Shorebank) demonstrated that banking could be successful in communities where disinvestment had occurred. It played a role, subsequently, in the development of the Community Reinvestment Act and in the creation and growth of the Community Development Financial Institutions industry. The governmental decision not to bail out an iconic organization whose founders heroically decided that they could buck received knowledge and succeed in inner-city investments at a time when redlining was the default banking mode will probably force others with similar goals to cut back on the extent of their commitment.

When the idea of Shorebank was just a proposal to purchase a bank and do inner-city investments as a way to produce community revitalization, a local community organizer and friend of the founders named Al Raby urged them to avoid communities that were already bottoming out and in terrible shape. The South Shore community in Chicago, by contrast, became the perfect location for the community development banking enterprise. Although in decline following the process of racial change, it still had quality housing stock and residents who had decent jobs. Quietly and methodically the company began to lend in the community and to participate in other ways to bring resources to it.

At that stage, it was close to a model community bank. Lenders came to know their borrowers very well. There were lots of contacts with community leaders. In some cases, bank officials became almost community representatives to city, state and federal governments, helping to direct resources into South Shore that otherwise would have gone elsewhere.

Those activities occurred in a particular moment in history. The company was founded when redlining was an open and naked activity. It was more acceptable then for whites to express prejudice against blacks and to act on that prejudice with discrimination. Subsequently, and sometimes through the efforts of Shorebank itself, things changed. Redlining in its most naked form declined. The Civil Rights movement and the legislation that followed helped to create a large Black upper working/lower middle class. Outright discrimination against African-Americans was no longer acceptable. The Community Reinvestment Act was passed and sometimes enforced, and big banks that had avoided the inner city began to open branches there. No longer the only player on the street, Shorebank began to look for market niches, among church groups and not-for-profit organizations, for example. It also developed a specialty: lending to developers of small multi-family units whose owners screened their tenants carefully.

At the same time, there was real pressure on the company to expand beyond South Shore. The founders wanted to demonstrate to the banking industry that such activity could be profitable. Supporters wanted to demonstrate that the mission worked in more than one particular community. Funders wanted more bang for their buck. And so Shorebank began an expansion program. The bank moved into more communities, purchased other banks and grew its assets from the low $30 millions to more than $2 billion. Not surprisingly, as an institution of that scale, it grew less innovative. But it also began to do bigger and more complicated deals, both to satisfy new investors and to raise national visibility by improving the bottom line. That growth brought fame and accolades, but it moved away from two of the elements that had brought early success. First, some of the new activity violated Al Raby’s rule, because it focused on communities that were in truly parlous condition. And with offices on the West Side of Chicago, Detroit and Cleveland, the organization was no longer a community bank in the sense described above.

None of that might have mattered so much if the economy had not collapsed as surprisingly and totally as it did. The organization had weathered other economic downturns. One common lesson from those downturns was that many of the bank’s customers were in the kinds of positions that were not so sensitive to variations in the economy. Government agencies and similar organizations were early in their willingness to follow fair employment practices. Jobs in these areas came to be defined by African-Americans as attractive and secure. The middle ranks of government positions — postal workers, bus drivers, school teachers — offered employment with opportunity, civil service protections and decent pensions. Similarly, jobs in hospitals, community service centers and the like had that same quality — job security in a world where discrimination was rampant. In a nearby neighborhood of similar social make-up, my colleagues and I found that more than a third of all those employed worked for city, state and federal governments. This was a higher percentage than non-African American neighborhoods of similar economic status.

However, the Great Recession has been different from the others, with large numbers of layoffs from all of the above. Many of those laid off were the renters of South Shore bank borrowers. In addition, the well-documented lack of back-up resources for the black lower middle class made the position of these people even more fragile.

As we all know, Shorebank was not the only bank that suffered major losses during this period. Unlike predatory subprime lenders or producers of doubtful financial instruments, it failed partly by moving beyond its main areas of competence. However, the federal banking authorities declined to help bail the company out, after they had raised required amounts of new capital. To its critics, Shorebank was just another community bank, rather than one with an extraordinary record worth supporting.

When one turns to the consequences of this one bank’s failure, one has to consider another shadow lying over the process, which relates to surprisingly dominant economic theory that guides much government decision making: if the market does not support an economic institution, it should die. (Although it must be noted that we have seen huge violations of that theory in action, because some institutions seemed too big to let die — including those whose activities helped cause the financial crisis in the first place.) 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.

On the other hand, if our story is correct, there is a case to be made for keeping scale down. Doing community development banking is not just like buying a refrigerator you plug in. It requires local knowledge, and, in that sense every effort must be shaped based on local conditions.

More serious than even those constraints, however, is a mood that seems to be sweeping the country. Although people like Robert Kuttner and Ralph Nader, and even the Chicago Tribune, pointed out that Shorebank stood for an activity worth supporting, the national mood is to be impatient with the poor, the out of work, and the excluded, and, consequently, hostile to efforts to provide assistance to those groups using federal dollars. Enthusiasm for the kind of enterprise Shorebank represented, particularly when it involved credit rather than “welfare as we know it,” reached its apogee during the Clinton administration and has been in decline since. This hostility is ironic given that there is also great anger at the high rates of unemployment.

But it is going to be difficult to raise funding for the types of efforts that Shorebank stood for, and as we watch the demonizing of CRA (some argue that it caused the whole recession), there seems little chance in the future for large-scale government support of inner-city development activity.

Richard Taub is the Paul Klapper Professor in the Social Sciences at the University of Chicago and professor of sociology and comparative human development. His interests include urban, rural and community economic development, the nature of entrepreneurship, public policy with particular concern about implementation and organization of policy initiatives, evaluation of social programs, and the sociology of India. He is the author of several books, including two books about Shorebank: Community Capitalism (Harvard University Press, 1988) and Doing Development in Arkansas (University of Arkansas Press, 2004).

This article appeared in the inaugural issue of The Journal of the Institute for Comprehensive Community Development, December 2010. Download the full issue.

    

Keywords: banks, community development, Community Reinvestment Act, Richard Taub, Shorebank

Posted in Journal Inaugural Issue: December 2010, Affordable Housing

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