Dec 12, 2010
Was ShoreBank a victim of its mission — to provide financial services and build wealth in low-income communities of color? Tim Fernholz looks at the myths surrounding the bank’s takeover this year in the latest issue of American Prospect.
In a sense the bank may have been a victim of its success. From its perilous founding, it found a niche helping small landlords rehab affordable housing, and its highly personal approach, knowledge of its neighborhood and attention to detail paid off. Along the way it served as a model for scores of community development banks — and showed big banks that serving minority communities could be profitable.
Founded with a $2.4 million loan in 1973, Shorebank had $2.6 billion in assets in 2008. But with success – and as the founders moved out of direct management – the bank moved beyond its “old-fashioned” view of a bank rooted in a community, expanding to Cleveland, Detroit, and the Pacific Northwest, even backing overseas development loans. And although Shorebank eschewed subprime lending, its borrowers were not safe from the housing crash, and losses began piling up.
The conservative contention that ShoreBank was politically favored, with connections to Presidents Clinton and Obama among others, might have been rendered moot when the FDIC closed the bank in August. But Fernholz notes “a new conservative conspiracy theory” – “regulators were letting the FDIC’s insurance fund absorb losses so that the social experiment could start anew.”
In fact the consoritum of investors who formed Urban Partnership Bank was tagged to purchase the bank’s assets only after hundreds of banks passed on the same opportunity. And the new operation will share ShoreBank’s losses with the FDIC, which would have been on the hook for the entire bill otherwise.
Now “ShoreBank’s experience is being taken as a call to end government support for community lenders, as though encouraging credit access in underserved communities is the moral equivalent of bailing out Wall Street’s megabanks,” says Fernholz. (This echoes the contention that the Community Reinvestment Act caused the crash by requiring investment in low-income communities; but the bulk of subprime loans came from unregulated mortgage companies and investment banks, and their securitization was a project of the higest rollers.)
Fernholz argues instead that ShoreBank’s experience is emblematic of the challenges facing small banks. And he cites bankers who say “ShoreBank’s failure was less because of its mission and more because of its business practices” – it “tried to accomplish too much, too fast.”
“The politicization of ShoreBank’s failure detracts from the urgent need to reinvest in these areas with sustainable, local loans,” writes Fernholz. The lesson is not that poor areas don’t deserve investment – indeed ShoreBank showed it can be done successfully. Perhaps it’s what founder Ron Gryzwinski wrote in 1991: “To serve almost any geographical or social community we might name, banks must either be small or at the very least maintain a local focus.”
And while big banks have gotten bigger on bailouts predicated on their risk to the financial system, it’s time to recognize the importance of small banks to communities and families, with “policies that encourage community banks to do what they do best.”