Post edited 10:35 am – October 7, 2010 by wspademan
Common Good Bank Implementation Path Aug-Dec 2010 (proposed 8/19/2010)
Background This summer, under the guidance of ALIVE Communities consultants, Common Good Finance held a series of stakeholder sessions designed to provide advice and input for our strategic planning. Out of those meetings came this exciting proposal for the months ahead.
Aug-Sep Continue to meet with conventional and alternative lenders in the Pioneer Valley of Western Massachusetts (CEOs and lending officers of banks, credit unions, CDCs, and community loan funds). Meet with those lenders individually and in small groups to refine together the Common Good Bank plan for outsourcing lending in the short term as well as once the bank opens (including developing contracts).
Aug-Sep Invite organizational stakeholders and others to serve on an Interim Steering Committee for the project. Stakeholders include lenders (both conventional and alternative) as well as economic justice, community development, and sustainability organizations. The Interim Steering Committee will meet quarterly in person in Western Massachusetts from September 2010 through October 2011, with meetings by phone or by email in the between months.
Sep-Oct Train current active organizers outside of Massachusetts. Test membership campaign strategy.
Oct-Nov Recruit and train Pioneer Valley organizers.
Oct-Dec Promote the project through a focused membership campaign concentrating on the Pioneer Valley. Membership will consist of three financial stakes in the Common Good Bank project:
Donation. An unrestricted donation of $25 to $25,000, to raise a total of $250,000 for current operational and development expenses.
Loan. A no-interest loan of 5 times that much to the Common Good Finance Loan Fund – a total of $1.25 million, to be invested short term (about one year) in low-risk community lending through existing community lenders and ultimately in the startup of a Common Good-type bank. Members will vote on the priorities for short-term investment. Common Good Finance will pay back these loans as soon as it can, after the bank opens.
Investment. A promise to invest 8 times that much (40 times the donation amount) in a Common Good-type bank once such a bank has a charter – a total of $10 million. By law the investment must be held in escrow until the bank opens. It is expected that members will be able to recover their investment within two years, with a planned return (no dividends, just appreciation) equal to the prime rate minus 1.5%.
Oct-Dec Members vote on priorities for investing funds from the Common Good Finance Loan Fund.
Nov-Dec Lend up to $1.25 million to local banks, credit unions, and alternative lenders for
up to one year, with the priorities voted by members. These loans will be focused on communities that have 25 or more Common Good Finance members (including any such communities outside Massachusetts).
Dec Apply for a bank charter. If the membership campaign takes longer, this step will have to wait. Engagement of organizations at an early stage could expedite the membership campaign.
Perhaps becoming a face for the "move your money" campaign is the next best thing. Getting to yes might mean developing a niche as a lender that is in between what community banks can do and what loan funds can do. It might mean developing a risk pool of capital that can be combined with depositor capital to allow CGB to make higher risk loans. This is the South Shore Bank model. A CG Bank might start as a fairly conventional community bank and move toward this higher risk model as it proved able to develop a risk pool of capital. Or we could stake our start-up energy on securing that risk pool – we would be occupying the niche that proponents of chartering a state bank believe is needed – a bank that will get out there and lend when others are sitting on their assets, so to speak.
Not sure if you meant Shore Bank (sbk.com). That's definitely the model for a community bank that "get's out there and lends." Part of that very important lesson is that Shore was the inspiration for and early supporter of Grameen (the "Village" bank) in Pakistan and now everywhere, the innovators of micro-finance. We now know that the repayment rates for micro-finance are on the order of 98%. That doesn't even begin to equate to "higher risk." On the contrary, its not that those on the lowest economic rungs, who might be called poor, are riskier, by that characteristic alone.
Sub-prime was that not because of the credit ratings of the people taking out those loans. It was the houses themselves, bloated because of the real-estate bubble and casino finance, and sold because of zero-down, houses that were beyond the means of those buying them, because they were grossly over-valued in the market, and made so because the banks could pawn them off to MBAs and other strange derivatives. By making the right kinds of loans, with great rates and service, and keeping the asset portfolio on the books, the CGB can return to "traditional" banking, and also be novel in the doing it of it, re-branding to a new generation of borrowers.
So yes, I say CGB should be a full fledged, full service bank in its own rights. In an era of casino banking, being an honest and ethical bank actually doing community banking, will come across as remarkable and refreshing. I don't see any problem getting a charter, attracting depositors, meeting FDIC or state banking rules. After all its the bank's job to access risk and do so prudently. Its the "what" of lending more so than the "who" of lending that must meet the test of time.
…may not wind up chartering a bank so much as setting up a "CGB Account" that will serve as a marketing vehicle for community banks. …"Common Good" would be re-defined as the work of community banks and CUs. …The downside is that you lose your tangible identity as a bank.
Yes. We have defined "Common Good Account' very carefully so that it fulfills ALL of the purposes of Common Good Bank. Conventional banks and credit unions cannot accomplish these purposes without a Common Good-type bank, so this path is very little different from the path without such outsourcing. This is just the deposit-acquisition outsourcing, which should be considered separately from the outsourcing of lending decisions.
You had asked earlier if the sense of community ownership among depositors could be met by saying "drive by the businesses, farms, houses that we made great loans with," whereas I argued that community ownership means being able to drive by a bank building and say, "we own it." …The sense of community ownership would not be very strong, I don't think. A stand-alone CG bank is more tangible and singular. It stands (for better or worse) on the reputation it earns and the loans it makes.
The Common Good Bank member/owners who decided those lending priorities for THEIR money might feel a strong sense of community ownership. Control tends to give us a stronger sense of ownership than a silent partner relationship.
But there is a deeper issue here, that you are alluding to. We want Common Good Bank loans to reflect Common Good Bank values. How can we cultivate that culture if conventional banks and credit unions are making lending decisions for us. Clearly they would have to share or adopt Common Good Bank values in order to find a suitable balance between sound business considerations and sound social considerations. Not easy. To a lesser extent, this might even be an issue with alternative lenders. I think this problem is difficult but not impossible.
… a bank that will get out there and lend when others are sitting on their assets, so to speak.
Yes. The theory is that we can make more secure loans by planning as a community, by getting a large number of people to accept a stake in the loans (by involving everyone in those decisions), and by partnering with organizations (like Community Development Corporations and Small Business Administrations) that train people to manage their businesses soundly. What we're talking about is democracy — a promising idea that ought to be tried.
Post edited 8:41 pm – August 28, 2010 by wspademan
Andrew Baker says (by email):
Here's the conundrum as I see it:
If you want to move quickly and charter CGB with the strategy you describe, you may not wind up chartering a bank so much as setting up a "CGB Account" that will serve as a marketing vehicle for community banks. That might not be a bad goal. The goal would then shift to being a face for the "move your money" campaign – out of big banks and into community banks and CUs. "Common Good" would be re-defined as the work of community banks and CUs. Outsourcing the deposit and lending functions gives you a number of positives: you stay streamlined, develop a collaborative model to work together with community banks and CUs, and have a franchiseable electronic model. The downside is that you lose your tangible identity as a bank. The question – is that a deal killer? Or do you work to re-engineer your customers' concept of 'banking' to fit this approach? Kiva and other on line loan funds provide the model for this kind of electronic banking. Or is this collaboration a stepping stone toward developing a full-fledged CG Bank that stands on its own?
On the other hand, the slower approach is to begin by developing an actual bank in one place, with its own lending and depositing functions. That bank then becomes the Queen Bee and can franchise off branches as deposits can be collected in other places, and lending expertise is then mobilized in those areas. The downside of this model is that it is slower, has more overhead, has to compete with other local banks and CUs in it s area, and has to develop its own capacity and expertise. The upside is that it is actually a bank in the more traditional sense. The definition of "Common Good" in this approach rests on the strength and quality of its own loans and its own customer service. It has real people staffing it and develops real relationships with others to develop loans and a depositor community.
You had asked earlier if the sense of community ownership among depositors could be met by saying "drive by the businesses, farms, houses that we made great loans with," whereas I argued that community ownership means being able to drive by a bank building and say, "we own it." The problem I have with the former approach is that what we "own" as the CGB community is only a collection of deals or more often small pieces of deals that others can also claim credit for. In your collaborative model, the loans made would be done by the partner bank of CU, making it even harder to identify them as CGB successes. The sense of community ownership would not be very strong, I don't think. A stand-alone CG bank is more tangible and singular. It stands (for better or worse) on the reputation it earns and the loans it makes.
The challenge at the root of either approach is whether CGBank can provide the FDIC benefits and security to depositors AND develop an on-line portfolio of loans that would meet banking risk criteria and compellingly demonstrate the 'common good'. If the answer is no, then perhaps becoming a face for the "move your money" campaign is the next best thing. Getting to yes might mean developing a niche as a lender that is in between what community banks can do and what loan funds can do. It might mean developing a risk pool of capital that can be combined with depositor capital to allow CGB to make higher risk loans. This is the South Shore Bank model. A CG Bank might start as a fairly conventional community bank and move toward this higher risk model as it proved able to develop a risk pool of capital. Or we could stake our start-up energy on securing that risk pool – we would be occupying the niche that proponents of chartering a state bank believe is needed – a bank that will get out there and lend when others are sitting on their assets, so to speak.
Where are the current active organizers located; in what states? Are there parallel campaigns to initiate this bank model?
Will there need to be a long lead time for the banks and credit unions to implement these loans? By all that I have read in the press, local businesses are desperate for loans and cannot find banks that will lend to them. I am assuming that the guidelines that the membership determine will really simplify the process for the lending institutions.
Our current organizers are in California, Oregon, Colorado, Illinois, Vermont, New Jersey, Missouri, Indiana, and Western Massachusetts. The campaigns are not parallel, we are all working to start the same bank.
We are still investigating the details of making funds available to conventional and alternative lenders for community lending in specific categories in the short term. We will need to reclaim most of the funds within a year, in order "to invest in a Common Good-type bank", since that is our main purpose. So the loans that are made in the short term will have to have a short lead time and (for the most part) a short duration.
How many members do you hope to recruit and what is the organizing strategy?
Are you going for eastern Mass or a certain mile radius from here?
Are you recruiting members outside of MA – looks like yes; do different states have different bank rules that will interfere with this?
We are looking for about 2,100 members (but possibly as many as 10,000, depending on what membership level people choose). Our organizing strategy is to train organizers extensively (our first group of 9 starts an 8-week intensive training program this week), then they invite people individually to become members and speak at house parties to invite several people at once. We will test the campaign in other areas, then focus mostly on the Pioneer Valley (Western Massachusetts only) while continuing in those test areas in other states as well. Bank rules in other states have no bearing, because we are not starting separate banks in other states.
I have one question about "Sep-Oct Train current active organizers outside of Massachusetts. Test membership campaign strategy."
Where are the current active organizers located; in what states? Are there parallel campaigns to initiate this bank model?
Second question: "Nov-Dec Lend up to $1.25 million to local banks, credit unions, and alternative lenders"
Will there need to be a long lead time for the banks and credit unions to implement these loans? By all that I have read in the press, local businesses are desperate for loans and cannot find banks that will lend to them. I am assuming that the guidelines that the membership determine will really simplify the process for the lending institutions.
Post edited 8:09 am – August 23, 2010 by wspademan
Mike Morton said:
If, for example, I want to donate $100, would I HAVE to then lend $500 and escrow $4000?
No, anyone can donate any amount, and/or lend any amount over $125, and/or iinvest any amount over $1000. The x5 and x8 multiples are for the suggested membership levels that we will be pushing in the membership campaign. For example, if you want to be a member at the "Two Bricks" level, you would donate $100 or more, lend $500 or more, and invest $4,000 or more. $25/$125/$1,000 is the (proposed) minimum for membership in Common Good Finance. So a donation of $100 would not fulfill the membership requirement, but it would be very gratefully received.
Note that we are talking here about membership in Common Good Finance, to support the ESTABLISHMENT of Common Good Bank. Membership in Common Good Bank, once it opens, will have very different, much simpler requirements. Specifically, anyone who opens a Common Good Account, signs the membership agreement, and makes a deposit of any amount will be a member.
Post edited 12:35 pm – August 21, 2010 by wspademan
Carol Lewis said:
I don't see the step listed that is developing the contractual tools that will connect membership campaign proceeds to the institutions lending them …
why is the time to "apply for a charter" so short if the goal is opening by the end of 2011? …could not at least the step that is actually lending the 1.25 million be reasonably extended to Jan – Mar of 2011? I'd hate to see this "promised" quicker than it can be delivered
Good points.
1. Actually I see the development of contracts as part of what happens in the first step "refine together the Common Good Bank plan for outsourcing lending" Aug-Sep (now clarified parenthetically). That would give us a month of slack before starting making those loans.
2. We want to apply for a charter as soon as we are ready. We will be ready as soon as the membership campaign is done. If the organizations get involved in September, I think we have a shot at finishing by December. That is the soonest I can imagine finishing. We will have a better sense of the timeline after the "outside Massachusetts" testing in September and October. We need to be planning for a realistic fast timeline, because the window of opportunity that we have today (this year) will not be open long.
I don't see the step listed that is developing the contractual tools that will connect membership campaign proceeds to the institutions lending them — I guess that is encompassed in" Lend up to $1.25 million to local banks….",. because this continues to seem to me to be a significant and not small task, I think at least (see my note 2) that the timeline for it is too short…
why is the time to "apply for a charter" so short if the goal is opening by the end of 2011? Seems to me an awfully lot to get done in just 4 months (Sept – Dec). Probably I'm just not aware of what's involved after "apply" — but could not at least the step that is actually lending the 1.25 million be reasonably extended to Jan – Mar of 2011? I'd hate to see this "promised" quicker than it can be delivered, and investors aren't even voting on priorities until Oct – Dec. How write a loan document with lender without knowing that? Seems like the timeline, as proposed, could create an unrealistic expectation and that would be a really bad idea for CGBs first effort to actually put some money into circulation.
print page
Login 
Register 
Search 
Home
Add a New Topic
Reply to Post
Quote and Reply 
Print this Post 
Topic RSS 
