Statement by Griffith L. Garwood, Director, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve Board System, before the Subcommittee on Financial Institutions Supervision, Regulation and Deposit Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 3. 1993 - Statements to Congress - Transcript

Federal Reserve Bulletin, April, 1993

Over the years, the Federal Reserve has made clear that investments for corporations or projects that are organized to build or rehabilitate high-income housing or commercial, office, and industrial facilities that are not designed explicitly to create long-term job opportunities for low-and moderate-income persons - even though such investments might provide some indirect benefits to low- and moderate-income persons - would be presumed not to meet the community welfare test. That distinction is important. The Federal Reserve does not want CDC authority used to enable bank holding companies to engage in large-scale real estate development or non-banking business ventures as a conventional business activity.

Nonetheless, the Federal Reserve recognizes that neighborhoods and communities in both urban and rural settings vary greatly in size, population mix, and economic condition, and it has remained flexible in applying the standards of Regulation Y for approval of community development activities. For example, approved community development activities have included, in one case, the creation of a rural test farm for crop experimentation that could help diversify a rural farm economy, and in another case, the rehabilitation of a medical services clinic to help attract doctors to a small rural community.

Characteristics of CDCs

Under Federal Reserve guidelines, community development investments by bank holding companies may be made on either a for-profit or a nonprofit basis, although most holding company CDCs and investments have been for-profit ventures. Although the Federal Reserve does not discourage profit seeking from community development investments by holding companies, significant profits are, as a practical matter, generally not expected.

The Federal Reserve also takes a flexible approach concerning the amount of capital that bank holding companies commit for community development investments. Although the Federal Reserve sets no minimum or maximum levels for capital investment by bank holding companies in CDCs or community development projects, it does expect that use of holding company equity for such purposes will be appropriate for anticipated investment activities, and certainly prudent with respect to the size, financial condition, and capitalization of the holding company. The Federal Reserve will not allow community development equity investments in amounts that might pose undue risk to the safety and soundness of the holding company. Recent legislation related to bank investments sets certain limits for banks themselves.

For practical reasons related to the functions of bank holding companies, the Federal Reserve also does not limit the geographic scope of a holding company's community development investments. Bank holding companies typically conduct their CDC and project investment activities in economically disadvantaged neighborhoods and communities in the market areas served by their subsidiary banks. As a result, although some holding companies focus their community development investment activities in one community or one state, others with banks in several states have established CDCs that have been approved to make investments on an interstate or even national basis.