Can Clinton's urban policies really work? B.E.'s economists weigh the value of empowerment zones and community banks in revitalizing America's cities - includes related article on prospects on jobs and increased incomes for African Americans - Black Enterprise Board of Economists - Cover Story

Black Enterprise, June, 1994 by Frank McCoy

The compromise plan will probably create new banks whose sole purpose is to spur economic development. Whatever amount of money ends up being allocated will be used for small business-credit, low-income housing, financial services and training. Existing minority-owned and community banks will also get a chance to distribute pieces of the financial pie.

But with spotty community lending records, most of the African-american-owned banks may have trouble qualifying for CDB backing. Because African-American banks tend to operate in communities that are disproportionately poor, where loans are disproportionately risky and where insurance is hard to come by, most tend to invest their capital in buying and selling government securities for their own accounts rather than in tending funds within their communities. Thus, there's an ongoing debate as to whether black-owned banks serve their communities to the limit of their capabilities (see "Building a Financial Powerhouse," this issue).

The big question is: Would the CDB funding let black banks that are meeting community needs do so more efficiently, and will it free banks that are not as active to do more community lending? No one knows, but there are strong opinions. Historically, a dearth of equity and loan capital has retarded the growth of black entrepreneurship. To Swinton of Benedict College, launching a network of CDBs could lay a foundation for filling that gap by providing a capital boost. But Brimmer disagrees. "I believe that creating new [federally sponsored] financial institutions ... is an outright mistake," he says. Such banks would be beholden to the government, rather than the market, and would thus not provide sufficient new resources for black opportunity.

The other significant problem with the CDB plan is the piddling sum of money involved. If, for instance, the full $500 million is approved for the CDBs and only one bank were to be set up in each state--which seems highly unlikely--it would receive only $10 million during a four-year period. The plan's weakness leads Irons of Clark Atlanta University to say, "It is ludicrous to throw out this amount of money nationally and to expect it make a difference." If the administration is serious about the plan, it should "add more money."

MAKING LENDING FAIRER

Of course, many African-Americans do not want special treatment. In recent years, a number of minority organizations have used the CRA--a law that Congress created to ensure that banks and thrifts provide equal access to capital--to inject new capital streams into African-American communities.

In July 1995, a new version of that act will give the law even stronger teeth. The reforms will put in place 12 performance tests for lending, service and investment that banks must meet, instead of only three tests now in effect. Among the new measures are: the demand that banks document where in their markets they actually make loans rather than simply showing how they are trying to expand their efforts; separate and less stringent lending policies for banks with less than $250 million in assets and tougher ones for those with more than $250 million; and active solicitation of community opinion about a bank's performance.