Gary H. Stern
Federal Reserve Bank of Minneapolis
Business Bankers Recognition Breakfast sponsored by the Minneapolis Community
Development Agency (MCDA)
April 14, 1999
Federal Reserve Bank of Minneapolis
Good morning. I would like to welcome you to the fifth annual Business Bankers Recognition Breakfast sponsored by the Minneapolis Community Development Agency (MCDA). We are pleased to host this year's event, and I am grateful for the opportunity to join you this morning to discuss community development lending.
This event is being held here at the Reserve Bank to highlight the accomplishments of commercial lenders who have partnered with the MCDA through its business finance programs. The commercial lending community plays a vital role in economic and community development in the city of Minneapolis. We at the Reserve Bank consider it a key component of our mission to support and encourage public/private partnerships such as those being recognized here today.
Often at events like this, I am asked to provide comments on the state of the economy or monetary policy, so it is refreshing to be talking to you about a somewhat different topic. I say somewhat different, because the Federal Reserve Bank's monetary policy and opportunities for community development are more closely related than they might at first appear. We in the Fed are well known for our strategies to promote a stable, low-inflation economic environment. However, low inflation is only a means to an end; the ultimate goal of Federal Reserve policy is to promote maximum sustainable economic growth and rising living standards over time.
I am convinced that a low-inflation environment provides the best climate for improving living standards, but it is evident that certain areas have been left behind during this time of prolonged, and rather remarkable, economic expansion. Pockets and neighborhoods within our core cities have not shared in the benefits of economic growth and therefore may well require extra attention to ensure that they too benefit as the overall economy progresses. One of the important limitations in these areas is access to capital—access that is critical to starting, growing, and maintaining successful businesses.
I'd like to turn now to the relationship between the lending community and the MCDA.
Bank loans are the primary source of debt capital for small businesses. Banks traditionally have made money by making loans to businesses and consumers, so they have both the resources and the expertise to finance business creation and expansion. Partnering with bankers to accomplish community and economic development projects provides a source of capital as well as additional expertise and technical assistance to the business borrower. A local banker can be a valuable resource to the borrower and a knowledgeable partner to local government in accomplishing community development deals.
These partnerships between local bankers and the MCDA are resulting in substantial community development activities in the city of Minneapolis. During the past 10 years, more than 1,000 companies have used MCDA business finance programs to access nearly $100 million in financing for a broad range of development projects. Even more notable is MCDA's success in leveraging private and other funding sources. In fact, these sources have contributed approximately 90% of the total dollars going into these projects.
Most MCDA loans involve partnerships with local banks that make this access to capital possible. MCDA projects often involve partnerships with community-based nonprofit organizations as well. These public/private collaborations help businesses gain access to the capital they need while providing profitable returns to bankers and benefits to the Minneapolis community.
So, why is the Federal Reserve involved in community development?
Our commitment to community development stems from the Fed's role as a bank regulator responsible for monitoring the community reinvestment performance of financial institutions. Having access to information on community reinvestment and market opportunities as well as unmet needs and challenges only enhances our ability to identify ways to fill those gaps.
The Federal Reserve is in a unique position to bring together banks, community organizations, local government, and developers. Our role is to provide information and technical assistance to financial institutions, community-based organizations, government entities, and a wide variety of other organizations regarding the Community Reinvestment Act, innovative models of community and economic development, and issues related to fair and equal access to credit. The Fed also serves as a resource regarding traditionally under-served markets and the tools and techniques available to help meet the financial needs of those markets. In these ways, we help to improve market practices.
In addition to providing resource information, technical assistance, and regulatory guidance, our objective is to foster collaboration and encourage public/private partnerships that target investment in low- and moderate-income communities throughout the Ninth Federal Reserve District. MCDA and the lenders being honored here today serve as a testimonial to the success that can be achieved through public/private collaboration.
I encourage each of you to continue to expand your involvement in community development projects in the coming years. Historically, community development lending has relied heavily on public subsidies and funding. Federal, state, and local dollars have made the "undoable" deals "doable", which has resulted in millions of dollars of community development projects in low- and moderate-income neighborhoods that otherwise would likely not have come to fruition. However, public subsidies are subject to changing political and budgetary forces.
The trend in recent years reflects a decreasing amount of public funding available for community development projects. As a result, sustainable community development will become increasingly dependent upon alternative sources of funding. The challenge that lies ahead is to find innovative ways to fund safe and sound community development projects with less dependence on public money, and to forge ongoing partnerships between public, private, and nonprofit organizations to ensure the success of these important efforts.