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via e-mail
October 30, 2003
Mr. Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Re: Comments, FDIC
To Whom It May Concern:
On behalf of the Cascadia Revolving Fund, a community development
financial institution (CDFI), we are 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.
In the past 18 years, Cascadia Revolving Fund has provided more than
$25 million in financing and offered technical assistance to
entrepreneurs and organizations in both Washington and Oregon states. We
lend to women, immigrant, minority, rural, and low-income entrepreneurs,
as well as non-profits engaged in community building activities.
Cascadia’s +$16 million in capitalization comes from an array of both
public and private investors, including regulated financial
institutions. Despite providing capital to high risk, largely unbankable
small business, we can claim an 18-year loan loss rate of less than 1%.
In our history, we have never failed to pay back an investor.
Cascadia Revolving Fund and our peer community development financial
institutions (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.
Cascadia applauds U.S. bank regulators and others who 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. Based on considerable
experience in the U.S. to date, CRA equity investments may sometimes
provide lower yields than other investments but they also have lower
default rates and volatility of returns than other equity investments.
For example, CDFIs in the network I represent have cumulative default
rates of less than 2.3%, which is comparable to major banks.
We are extremely concerned about the potential consequence of the
proposed rules that could affect adversely 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 in need.
CDFIs and their bank partners have invested substantially in affordable
housing and economic development (for example, through Low Income
Housing Tax Credits (LIHTC) or New Markets Tax Credits (NMTC)) 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 for affordable housing and community
revitalization is well-established public policy in the United States.
Bank regulators and the Congress have encouraged and provided incentives
to encourage 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
by-and-large profitable and, more importantly, it 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 your consideration.
Sincerely,
Shaw Canale, Executive Director & CEO
Cascadia Revolving Fund
1901 NW Market St.
Seattle, WA 98107-3912
206-447-9226 ext. 104
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