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via e-mail
October 30, 2003
Mr. John D. Hawke, Jr.
Office of the Comptroller of the Currency
250 E Street, SW
Washington, DC 20219
Fax: (202) 874-4448
regs.comments@occ.treas.gov.
Attention: Docket No. 03-14
Ms. Jennifer J. Johnson, Secretary,
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Fax: (202) 452-3819
regs.comments@federalreserve.gov
Attention: Docket No. R-1154
Mr. Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Fax: (202) 898-3838 comments@fdic.gov.
Attention: Comments, FDIC
Regulation Comments, Chief Counsel's Office
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Fax: (202) 906-6518
regs.comments@ots.treas.gov
Attention: No. 2003-27
To Whom It May Concern:
On behalf of Woodstock Institute, a 30-year-old Chicago-based
nonprofit working to promote community reinvestment and economic
development in underserved areas, I am pleased to provide comments in
response to the Advanced Notice of Proposed Rulemaking on the proposed
Risk-Based Capital Rules, published on August 4, 2003.
The Institute serves on the Boards of the Coalition of Community
Development Financial Institutions (CDFIs) and the National Community
Reinvestment Coalition. Woodstock also convenes the most active local
community reinvestment coalition in the country, the Chicago CRA
Coalition. CDFIs invest in small businesses, quality affordable housing,
and vital community services in underserved markets. Nationwide, CDFIs
manage more than $8 billion that they lend and invest to create
opportunities for economically disadvantaged people and communities.
CDFIs have helped move economically underserved people and markets
into the mainstream financial system, provided an alternative to
predatory lenders, opened new markets to banks, and successfully
redefined the perception of risk in low-income communities. The
Institute is considered the national documenter of the role and
performance of CDFIs, and recent Woodstock research highlights the
importance of CRA-related bank and thrift investments in CDFIs.
Woodstock applauds U.S. bank regulators and others who have
recognized the vital role of Community Reinvestment Act (CRA)
investments in the U.S. and negotiated for a special rule for
“Legislated Program Equity Exposures.” This section wisely preserves the
current capital charge on most equity programs made under legislated
programs that involve government oversight. CRA-related investments are
generally held harmless under the proposed rule. Insured depository
institutions investing in such programs therefore would set aside, by
and large, the same amount of capital for CRA investments under the new
rules as they do now—about $8.00 for every $100 of capital invested.
Given that CRA investments in affordable housing and community and
economic development have a different risk/return profile than other
equity investments, that treatment is appropriate. CRA equity
investments may sometimes provide lower yields than other investments.
However, they have lower default rates and volatility of returns than
other equity investments.
However, Woodstock is very concerned that the proposed rules could
still adversely affect the amount of equity capital flowing into
investments under the CRA. Specifically, the “materiality” test of the
proposed rules requires institutions that have, on average, more than 10
percent of their capital in ALL equity investments, to set aside much
higher amounts of capital on their non-CRA investments, such as venture
funds, equities and some convertible debt instruments. As drafted, this
calculation includes even CRA investments that are specifically excluded
from the new capital charges.
Having to include CRA investments, with their very different
risk/reward profile, in the “materiality” bucket of more liquid,
higher-yielding, more volatile equity exposures could have an unintended
chilling effect on the flow of equity capital to communities. CDFIs and
their bank partners have invested substantially in affordable housing
and economic development (for example, through Low Income Housing Tax
Credits or New Markets Tax Credits) that currently approach, or even
exceed, the 10 percent threshold just from CRA-qualified investments
alone. If the materiality test is adopted as proposed, it could
discourage banks from making CRA investments to avoid triggering the
higher capital charges on non-CRA investments. We understand that these
higher capital charges could be twice as much on publicly-traded
equities, and three times as much on non-publicly traded ones.
Financial institutions’ support of affordable housing and community
revitalization is well-established public policy in the United States.
Bank regulators and the Congress have encouraged investment in poor
communities through such public policy initiatives as the 1992 Public
Welfare Investments (Part 24), the 1995 CRA revisions that specifically
encouraged equity investments, and both the LIHTC and NMTC program
incentives. Furthermore, in 2000, the Federal Reserve Board released a
study confirming that CRA-related investing is profitable and pleases
the double-bottom line—social impact and financial reward, with little
or no risk to investors. These facts, combined with a remarkable
performance record of CRA-related investments and more than a $1
trillion invested to date, provide a strong rationale to exclude CRA
investments from the materiality test calculation. Thank you for the
opportunity to comment on this important matter, and please do not
hesitate to contact me for further information.
Sincerely,
Malcolm Bush
President
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