Alexander Doll Company in Harlem
On June 17, Chairman of the Board of Governors of the Federal Reserve Bank System Ben Bernanke addressed the Global Financial Literacy Summit in Washington, D.C. He spoke about the challenges and opportunities facing community development financial institutions (“CDFIs”). Such organizations reach consumers in traditionally underserved markets, helping them to manage credit, buy homes and start small businesses. There are more than 1,000 CDFIs holding about $25 billion in assets and like everyone else, they are affected by the economic downturn. Philanthropic funding to these institutions has declined as foundation endowments and investment earnings have declined in value. At the same time, support for CDFIs from state and local governments and more traditional institutions are also declining. In particular, banks that sought to avail themselves of Low-Income Housing Tax Credits saw the value of those credits decline as tax credits declined in value commensurate with their deposits.
I read Chairman Bernanke’s speech in its entirety and my reaction to his remarks is mixed. On the one hand, I am always glad to see the issue of financial access on the radar screens of regulators. But at the same time, I am troubled by the philosophy implicit in the Chairman’s remarks and in the Obama Administration’s financial regulation white paper. Their view appears to be that banks have to be bribed and cajoled by tax credits or regulatory fiat into doing business in low-income areas. In fact, low-income areas are often vibrant entrepreneurial communities, creating opportunities for themselves after larger corporations have moved employment elsewhere. As long as banks perceive the stick as the inducement to enter these markets, they will not stay for long, when the stick becomes less menacing, as it does in an economic recession. However, when banks see the carrot, the profit opportunity for reaching under-served markets, their commitment will be sincere and longer-lasting.
For a more forward-looking perspective on the purchasing power, due to income density, of under-served urban areas, check out the Initiative for a Competitive Inner City (“ICIC”). When I was in business school, I received an award from the ICIC for a case study I had written on the Alexander Doll Company. The award provided for my participation in ICIC’s annual program for MBA students. The Alexander Doll Company is based in Harlem and manufactures the Madame Alexander line of dolls that I was given as gifts as a little girl. No one who would tour the doll company (and I encourage you to do so!) would see under-served communities as economic basket cases. I think that the future belongs to institutions like CheckSpring Bank in the South Bronx and the Alexander Doll Company that act on opportunities to build their workforces in very motivated communities.