European Community Reinvestment Act

European Community Reinvestment Act
European Commission Group on Social Enterprise
11.06.12

Broadly we would support the idea of something like a European Community Reinvestment Act (CRA) ] but perhaps with a different name so that all are clear it is different to the USA legislation. Social Impact European Financial Act would be a more appropriate name.

CRA is not a tax, therefore has zero negative impact on the competitiveness of a domicile, which is a major issue for financial centres in Europe.

It only applies to activity within a region (by any institution, whether domiciled in that region or not) and it does not apply to activity outside a region. So a transaction between parties outside of Europe would be excluded from analysis, but the activity within Europe would be analysed and interrogated to see that the organisation does spend a certain proportion of its activity serving deprived areas/certain community groups/certain sectors. So a bank domiciled in London/Paris but with all its activity taking place outside Europe would not be affected. Conversely a bank domiciled in a tax haven but doing all its business in Europe would fall under the CRA. However, it’s not clear if it would equally affect business carried out in Switzerland and Lichtenstein.  

CRA as a principle is clever because it encourages fair play, reduces inequality and importantly has zero impact on global competitive advantages or disadvantages.

Finally, it is important to remember that CRA has two components:

1) the first is a requirement for banks to disclose a certain amount and type of information about the nature of their activity ] this is good because it throws light on whether a bank is actually serving its community, for example whether it is taking deposits in one area but not lending etc. – this part is known as HMDA (home mortgage disclosure act) in the USA;

2) The actual CRA legislation that forces certain proportions of lending/bank activity in certain areas.

The two obviously go hand]in]hand. It is unwise to set lending targets without clear data about what situation you are trying to balance or correct.

One example of a mechanism that could be implemented: 

In each Member State – except for the ones facing a banking crisis such as Greece and Spain – a percentage of commercial banks’ reserve requirements (as established by the Central Bank) would be available for social investments: 4% when commercial banks want to invest directly; 2% when they use specialised intermediaries ie. social investors. The potential margin that intermediaries could make would have a ceiling (to be established).

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