Banks as a Social Institution Part I: Shorebank

Shorebank was named one of the 45 social entrepreneurs changing the world by Fast Company. Its banking model was unique in that it focused on reinvesting in the community, offered banking services to under-served communities, and gave direct support to nonprofits. Shorebank was also instrumental in setting up lending programs in other countries, most famously advising Nobel Prize winner Muhammad Yunus in the creation of his Grameen Bank model. It has now become part of the collateral damage of the financial crisis, and will be reborn as the Urban Partnership Bank.

The fact that a bank with a social mission failed alongside its profit-for-profit-sake brethren during an economic downturn may not be so much a reflection on its pioneering socially responsive banking model, as much as it reflects on resiliency in an interdependent financial system. Some would put the primary blame for the financial crisis on the Community Reinvestment Act and the fact that the Government Sponsored Enterprises Fannie Mae and Freddie Mac were directed to purchase low-income loans for sale into the secondary market. The evidence shows, however, that these loans represented only a small percentage of overall subprime loans. The Fed's low interest rates, coupled with lack of due diligence and predatory practices of mostly private lenders, along with the fragmentation of these loans through securitization (which hid their true risks through AAA ratings), were more to blame for the proliferation of such loans.

Neither investment banks nor the non-bank lenders which originated a great many of these subprime loans fell under the regulatory rules that governed the CRA. The actions of Fannie and Freddie were contributory, but it was not - as some would charge - because they pressured private lenders to make subprime loans. It had more to do with the fact that they too were trying to keep pace with competitors in the market mania of a housing bubble, cheap credit, and debt securitizations. Even if one were give all the fault over to the subprime mortgages for this most recent crisis, it wouldn't explain all the precursors which were different in scale but not in their core natures. There was the LDC debt crisis, the S&L crisis, LTCM, the Asian crisis, the Mexican crisis, and the Russian crisis. If a singular rapscallion was to be named in these financial dramas, it would more accurately be the financial mindset which directed the economy into expansive securitization and hyper-speculation ultimately moving to its latest arena - the housing market - where risk was more expansively unloaded onto the population at large.

Yet, again, we have a case of collective amnesia. Firstly, we have forgotten the financial crises of yore because they were contained through government interventions. Secondly, we are forgetting what motivated the emergence of a bank model such as Shorebank and, subsequently, the CRA. Redlining, underpinned by racism at a time when there were tumultuous episodes of unrest begging for some socio-economic responses, precipitated the provision of low-income financing mechanisms. Was this the best response to the problem? Is homeownership a reasonable goal for lower and mid-income groups? Should there have been a push for more affordable housing in lieu of mortgages? Should Fannie and Freddie have been restructured or dismantled? These are all reasonable questions - but the pointed fingers aren't asking any of them.

Photo Credit: by David Paul Ohmer