#1472 1973 · ShoreBank · community banking
A Chicago Bank Funds Redlined Blocks With Outsiders' Savings
the problem
Redlining wrote off Chicago's South Side: banks lent nowhere there, and nobody believed anyone would fund lending there.
background
In August 1973 Ronald Grzywinski, president of Hyde Park Bank, together with Milton Davis, Jim Fletcher and Mary Houghton, acquired a small neighborhood bank, the South Shore National Bank, in a community Chicago's lenders had written off. Their thesis, that profitability and community development could be one mission rather than a trade-off, was in 1973 a radical idea.
The bank became ShoreBank, what a Federal Reserve Bank of New York fact sheet calls the country's oldest and largest community development bank. By 2001 it held $976 million in assets and $516 million in loans, with 43,000 checking and deposit accounts, 1,600 real estate loan customers, 1,000 small and mid-size business clients and 390 faith-based organization customers on Chicago's South and West Sides.
what everyone would do
Wait for anti-redlining laws and government programs, or make charitable grants to the neighborhood.
what they saw
The lever was deposits: millions of outsiders held idle savings that earned nothing anywhere. Earmarking them to South Side lending turned 'unbankable geography' into a fundable loan book without subsidy.
the move
ShoreBank's engine was deposit gathering outside the redlined geography: it attracted deposits from socially motivated savers, churches, not-for-profits and individuals, and relent them as small-business, housing renovation and community-facility loans inside disinvested neighborhoods. Nonprofit affiliates, a neighborhood institute, a housing development corporation and an advisory service, wrapped the bank in training and development help, so borrowers arrived more bankable than the map suggested.
why it works
Mission depositors accept below-market convenience for a story that their money works; on-the-ground affiliates convert apparent risk into underwriting; and as the neighborhood stabilizes, deposits and credit quality reinforce each other.
the payoff
By 2001: $976M in assets, $516M in loans, 43,000 deposit accounts, 1,000 business borrowers, 390 faith-based customers (NY Fed fact sheet).
where it breaks
It fails when mission momentum outruns underwriting: ShoreBank was closed by Illinois regulators in 2010 after crisis-era losses. The deposit story could fund the loans, but only discipline could keep them good.
what came after
Invented community development banking, a regulated deposit-funded bank whose product is neighborhood revival, copied nationally and exported through its advisory arm. Illinois regulators closed ShoreBank in 2010 with the FDIC as receiver; the model outlived the bank.
references
- [1]ShoreBank fact sheetFederal Reserve Bank of New York, 2001newyorkfed.org
- [2]Too Good to FailStanford Social Innovation Review, 2011ssir.org