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

Despite this flexibility, we do expect that bank holding companies will seek and consider the views of the affected neighborhoods or communities when making an investment decision, although the Board does not specify any particular approach for ensuring community involvement. Some holding company CDCs have established community advisory committees in each community where projects are considered, while others use community outreach vehicles already established by their affiliate banks. Although community representation on the board of directors of a bank holding company's CDC may be helpful in certain situations, it is not required.

Types of Community Development

Investments

Let me now turn to the various approaches used by bank holding companies when making community development investments. There are four primary ways in which bank holding companies utilize their authority for community development equity investment, and these methods are not like those used by national banks. First, the bank holding company can establish a wholly owned, de novo CDC as a stand-alone subsidiary. Usually, the holding company capitalizes the CDC with an initial equity contribution and may provide loans or lines of credit to fund the CDC's investments and lending. The CDC then becomes the vehicle that makes debt and equity investments in community development projects. An advantage in having a subsidiary CDC is that it can be used by the holding company to support a variety of projects over time.

Currently there are about forty CDCs operating as wholly owned subsidiaries of bank holding companies. One example is Banc One's CDC, which provides equity investments for projects identified and supported by the holding company's subsidiary banks that are located in many states. The CDC has participated in several neighborhood housing renovation projects in Cleveland, Columbus, and Dayton, Ohio, and in Milwaukee, Wisconsin. It also has invested in the Ohio Equity Fund, the Wisconsin Equity Fund, and the National Equity Fund, all of which help finance acquisition and renovation of lower-income housing projects in several communities. Other large holding companies, such as Citicorp, Chase Manhattan Corporation, and J.P. Morgan and Company in New York, have formed wholly owned CDCs, but many smaller holding companies that serve smaller communities or neighborhoods have also used this approach. For example, Moxham Bank Corporation of Johnstown, Pennsylvania, formed a CDC that became a limited partner in a fifty-eight-unit apartment complex for lower-income senior citizens.

A second approach, one that is increasingly popular, is participation in a multi-investor consortium CDC that, in turn, invests in one or more community development projects and business ventures. Sometimes called multibank or non-bank CDCs, these CDCs are intermediaries that pool the investments of several financial institutions or other investors. Participation in a multi-investor CDC enables a bank holding company to share community development expertise, resources, and risks with others; such participation is an especially valuable tool for smaller institutions that do not have sufficient capital by themselves to make larger investments, which can have the most significant impact on community development needs. In rural Illinois, for example, the Tri-County Community Development Corporation was created by two bank holding companies - FirstBank of Illinois Company, in Springfield, and Farmers Holding Company, in Jacksonville - along with several smaller banks, all located in three adjacent counties in western Illinois. A local utility, a power cooperative, and a local chamber of commerce are also investors. The CDC's purpose is to promote economic development and to help new and existing small businesses to expand, thereby creating jobs in the three-county area. The CDC provided financing that helped attract a music company distribution center to the area, and it is also participating in a state program that assists companies in retooling and modernizing their facilities.