Lessons from “The Town That Loved Its Bank”

The lessons from The Town That Loved Its Bank in the Sunday New York Times yesterday hit home for me and, I think, should provide some insight into the challenges of philanthropy and investment in the effort to build stronger urban communities.

Not an unusual setting for America. Suburbs of a major city (Maywood outside Chicago here). Blue-collar neighborhood, mostly African- American. Hit hard by globalization. Main Street emptied by lost industrial jobs. Pushed to the wall by the housing crisis.

The unusual part – a private bank showing an unusual interest in restoring the urban fabric of the community by acting as both a philanthropic and a financial investor. This particular bank, Park National, was one of nine that collapsed last fall that executed a mixed impact/financial strategy to revitalize this economically challenged community.

The strategy included investing in the community’s redevelopment bonds, retail development loans and foreclosed homes for resale, underwriting interest free construction loans for social infrastructure like schools, and putting 20% of annual profit into charitable contributions for inner city redevelopment, education, affordable housing and financial empowerment programs.

Understandable, US Bank, which purchased Park National’s assets, is now facing tough criticism from the community, which wants to have their philanthropy bank back. This clearly creates issues for US Bank, a retail bank with a national footprint that’s especially strong in the Midwest. US Bank, as a large financial institution, has established policies and levels for giving that will squeeze Park National’s previous commitments.

This case study questions the business model for all of us who want to push the mixed philanthropy/investment strategy in developing cities everywhere (not just in the US):

  • How do you implement a mixed market/impact/philanthropy strategy? While some BOP business models, like microfinance or SME development, aspire to moving entities up the learning chain, getting the mix right and aiming the appropriate type of intervention at the right kind of project is tough. Investment vehicles of all kinds – philanthropic or not – have to be aimed at instilling a certain degree of financial discipline so that the investee ideally moves closer to self-sufficiency through that effort. As an example, setting a partial credit guarantee level too high may discourage investees from due diligence and prudent financial management. Setting it too low may not result in the right level of risk-taking or may result in no uptake from investees whatsoever.
  • How are you growing the balance sheet? Acquiring assets and other institutions’ assets for the sake of rapid growth or to take advantage of undervalued assets can lead to problems. This institution grew its balance sheet by 35% in a year (high growth developing country increases). These are assets that require special risk management and intensive involvement with partners and communities.
  • What are the risks on the asset side? How correlated? Urban redevelopment and property, in general, tends to be local local local – potentially regional. Generally only large, well capitalized firms can afford geographic diversification without losing touch with (and raising risk of) individual projects. Unfortunately, that means that larger economic phenomena can swamp many large commitments and investments at once, as happened in this case. Diversification may lower overall portfolio risk, but that depends much on the organizational dimension.
  • Where do you stand vis-à-vis government policy? As organizations whose mission and function lie somewhere between private financial institutions, policy banks and non-profit foundations, a mixed strategy can lead to a spaghetti of relationships with government agencies at various levels of involvement. It’s a challenge to make sure that one part of your strategy isn’t falling afoul of government while another is receiving distinction for good works.
  • How close can you get to your stakeholders and partners? “Big banks will never be mistaken for the old corner bank.” An organization with a strong local presence may necessarily be disconnected from the center. The highly centralized organization may not have the resources or corporate culture to deliver local solutions and attention. Businesses aiming at the BOP, especially financial services or capital related, will always be relationship intensive and require local commitment on some level.
  • What’s in your capital cushion? This bank held “too safe to fail” securities of Fannie Mae and Freddie Mac. Whether it’s equity or equity plus credit guarantees, it’s crucial to consider seriously the risk inherent in your capital and your capital providers. Developing in cities requires large fixed investments that can easily fall afoul of business cycles because of the long range planning required.

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