Community Re-investment Act
Chrisanthi Giotis, Social Enterprise Magazine
The message from the room was loud and clear. The banks have had it their own way for long enough. Now they must do more for communities, says Naomi Kinsley
Last week we convened a group of some of the most influential figures in social investment and community development to look at how we can get banks to be more transparent about their activities and do more for disadvantaged neighbourhoods.
A wide range of activists, thinkers and community investors – including representatives from ACEVO, the Campaign for Community Banking Services and Urban Forum – joined us to sow the first seeds of what we hope will be an influential coalition for banking reform.
The main topic for discussion was the US Community Reinvestment Act (CRA), which compels banks to reinvest in communities where they take deposits.
Social Enterprise readers will no doubt be familiar with the debate, but it is worth recapping. US banks’ CRA ratings are made publicly available. If the regulator finds that a bank is not serving low and moderate income neighbourhoods, it can prevent it from merging with another lender, opening a new branch or expanding any of its other services.
As a result, banks are encouraged to provide services in disadvantaged communities, or to invest in non-profit lenders such as community development finance institutions (CDFIs), which provide personal loans and business finance to those who struggle to access credit on the high street.
Our interest in this is clear. The CDFA is the trade body for CDFIs in the UK. From our study tours to the US, where we have spoken to regulators, practitioners and community groups, we have seen at first hand the massive impact the CRA has had on American CDFIs – and more importantly, the neighbourhoods they serve. Financial institutions in the US routinely invest well over $1.5bn into the US CDFI sector every year.
But this is not just about capitalising the CDFI sector. The whole of civil society stands to benefit from fairer, more transparent and more inclusive banking.
It doesn’t mean we have to replicate the CRA in this country. The CRA operates in a very different policy landscape from ours, with its main sanction, the denial of mergers and expansion. But there is so much we can learn from it.
We have a challenge to convince the government and the banks that this is in their interests.
Regulators have been swayed by scare stories that the CRA caused the global credit crisis. There is a wealth of evidence available the contrary – which we can produce to dispel the myth once and for all.
Banks, naturally, are concerned about the impact on their bottom line. But no bank operating in the US has been hurt by the CRA. Following the same principles of transparency and community investment will deliver something the industry sorely needs, even if it does not realise it, it will restore trust between the banks and their customers.
Building the coalition is the easy part. Convincing policy makers and the banking industry of the need for change will be infinitely more difficult. But the prize is worth the fight.
Naomi Kingsley is chair of the Community Development Finance Association (CDFA) and CEO of the London Rebuilding Society