munities, particularly without government guarantees or mandates. It is easier to obtain a grant to study poverty in the inner city than it is to obtain a loan to start a business in the same area. I have had a young black man tell me quite forthrightly that unless I could offer him a job, words alone about how he should spend his life were meaningless. Yet role models in the inner city to help young people get into business and get jobs are rarely available. Even with Metropolitan Life as our partner and a state agency with a non-cancelable 15 year lease, we had a hard time obtaining competitive financing for Ruggles Center. We had to rely exclusively on trade union pension plans who were motivated in part by the need for construction jobs. Even then the financing required a 100 percent payout over the term of the initial lease, thereby increasing the up-front equity requirement for the project. A second factor has been the inability to attract tenants to our development even though it is on a major transportation rail line, adjacent to a major university and one mile away from seven worldclass teaching hospitals and the Museum of Fine Arts. The najor resistance of potential tenants has been due to our Roxbury address and our proximity to two public housing projects. Two major hospitals have had commitments to move their research facilities to a site an equal distance away. Even though the site has been stalled due to the inability to get financing and to the fact that the space will be almost $10/sq. ft., more expensive than our site, we have yet to attract a hospital tenant. One hospital administrator admitted that if we could move the low-income projects away, the hospitals would flock to our site. These are the issues that restrict investment and capital in our cities. Fear of crime, concern about the skill levels of the workforce, and poor services all lead to a policy of disinvestment or neglect. How can we change these attitudes, real or perceived? What can we do when so much before has failed? The first step in changing these attitudes is to empower and reward those businesses who have already decided to invest in the inner city such as the architects, accountants, banks, caterers, insurance agents, consultants, real estate managers, engineers, lawyers, manufacturers, suppliers, etc. who already have proven expertise but have had a hard time breaking into closed "old boy" networks. We should take inventory of inner city businesses we have now and find ways to help them expand. We should encourage large corporations and government-funded institutions to purchase goods and services from inner city suppliers. This could be in the form of tax credits or other contracting incentives. I understand that affirmative action is under fire and I agree that such incentives should not be raced-based but resultsbased. The result being the creation of inner city jobs and businesses. Affirmative action has in tact worked to create a cadre of experienced African-American professionals whose parents were excluded from the workplace. We need to bring a portion of these professionals back into the inner city so that they can be the role models for future generations. I also feel strongly that we must strengthen and preserve our minority-owned banks and financial institutions. No community can survive or thrive without a financial intermediary that can effec tively channel resources into and within a community. The large banks are too big, too removed and too inexperienced in the culture and knowledge of inner cities in order to respond to micro issues. CRA laws and incentives need to reinforce investment in community development banks and other venture capital vehicles controlled by minority entrepreneurs who have their own capital at risk. Community Development Bank investment tax credits for corporations and banks that invest in inner city banks would be one possibility. Another would be SBA guarantees for investors in minority-owned banks. In conclusion, we must begin to change the economics of our cities by committing to a social and economic compact between inner city businesses, large employers and government that sets real urban investment as a priority. We must provide a framework in which dedicated and talented entrepreneurs will have the opportunity to start businesses, provide jobs, pay taxes, create wealth and establish community values and pride. In my own city of Boston, two thirds of the adult population is white but two thirds of the population under 18 are children of color. We must provide these youth with the skills, values and motivation needed to move our city into the 21st Century. Enterprise zones may be one tool in this process but we still have to put the players on the field that will turn our cities into economic winners. Anything less will be one more well-intentioned failure at the tax-payers' expense. TESTIMONY OF KIMBERLY J. LEVINE The Adams National Bank is a small women and minority owned bank located in the District of Columbia. Formed in 1978 as The Women's National Bank, our mission is to meet the lending and depository needs of small and medium sized businesses within our market area, with particular emphasis on women and minority owned and managed firms. I have been asked to come here today to try and address some of the impediments to capital access for inner city and minority owned businesses. Most people I believe will acknowledge that the inner city suffers from a lack of investment. In large part what is needed are incentives that would enhance this type of investment in inner city and minority businesses. This may take the form of incentives for businesses to enter the inner city as well as support for financial institutions who make these investments possible. When a coordination of interests can be obtained among the needs of the inner city and the needs of the merchants, such as providing new employment opportunities, for instance, everyone's economic well being prospers. Local governments can help in this respect by developing coordinated economic development plans in which the minority and community financial institutions have a key role and actively participate. I believe incentives as opposed to legislating compliance are necessary in order to promote this kind of business ownership in the inner city. We need more creativity and banks can play an important role in this proc ess. Banks are very often the source of capital for business investments, with minority owned banks playing a particularly strong role with respect to inner city and minority owned businesses. At this juncture, it is very difficult for small start-up ventures without any capital of their own to obtain bank financing. The failure rate for start-ups is high and banks already suffer from regulator anxiety. By that I mean there is already the fear that an examiner will come in and criticize a loan if there is anything at all out of the ordinary with respect to underwriting. Therefore banks shy away from this type of lending. Another impediment is that the loans are generally of a smaller amount and yet require virtually the same amount of internal costs as far as loan underwriting and maintaining an adequate amount of ongoing regulatory documentation. In addition, the overall regulatory paperwork burden placed on banks creates an overload of time and energy and redirects the banks attention away from the business at hand-lending. While enterprise zones targeting minority disadvantaged areas can provide some incentive for banks to loan in these areas, guarantees of only 50 percent, such as we are seeing in our local area, are not sufficient, especially for a small minority bank, to offset the high level of risk inherent in these areas. Small Business Administration (SBA) programs provide a better incentive for small business lending with guarantees up to 90 percent, however the stringent requirements which the SBA has for all of its loans, regardless of size, make the effort of providing an SBA loan too expensive and time consuming to justify making a small business loan, regardless of its location. Many financial institutions have a minimum size threshold for SBA loans that they feel make economic sense. It would help if the SBA would relax somewhat its regulatory requirements for small business lending in the range of $10 to $50 thousand, so that the SBA would accept the bank's own document package, while of course maintaining a sufficient comfort level as to the bank's loan policies and procedures and underwriting practices. Expertise is not the minority bank's problem in providing loans to inner city and minority businesses, it is the lack of financial incentives to offset the high level of risk and cost involved in the transaction. Obviously, the overall goal is to enhance economic opportunity within the inner city. Minority banks have traditionally filled the role of loaning to minority enterprises, many of which are in the inner city. Therefore any measure which supports minority banks will help in achieving this goal. For example, the Department of Energy currently operates the minority financial institution deposit program. As a participant of this program for many years, it has provided a welcome stable source of funds to minority banks which can then be used to fund its lending. While the program does not specifically provide these funds on the condition that they be used for loans to minority businesses, the program recognizes that providing these minority loans has been a staple for minority banks. By further expanding the program, as has recently been undertaken by the Department of Energy, the stated goal is being achieved. Although it is not yet clear, the new regulatory requirements on brokered deposits may create some restrictions to expanding this program to its full extent. On the other side of the coin, is the negative impact of the nonconventional competition which banks have experienced from the money market funds. To the extent that there has been disintermediation, funds flow out of banks and into the money funds, yet these nonconventional competitors are generally not making loans to inner city and minority businesses. Thus efforts to assist small and minority banks in finding affordable core deposit funding sources will further the economic goal of funneling the money back through the community. In this day and time, the financial community is seeing many banks falter and in jeopardy of closing their doors. The regulatory agencies have adopted the practice of putting the failing financial institutions out for bid and using the "least cost" method of determining the winning bid. These situations can provide an opportunity for minority banks too acquire all or a portion of the failed bank's assets and liabilities. By creating a larger minority bank, more comfort can be gained that the capital needs of the minority community will continue to be addressed as well as helping the resultant bank overcome some of its size limitations. However, since the regulators require minimum capital levels in order to approve the acquisition of one financial institution by another, the level of the minority bank's capital base can be an impediment to acquiring another financial institution. At present the Resolution Trust Corporation has an interim capital assistance program available to financial institutions in acquiring failed savings banks. The Federal Deposit Insurance Corporation, however, does not have a comparable program for banks. Recently, Adams acquired the insured deposits of another local financial institution which failed. We had the luxury of an extremely strong capital base, something most financial institutions cannot boast. Since the present capital base of many minority financial institutions would not permit them to acquire another financial institution, an FDIC capital assistance program comparable to that offered by the RTC could help ensure the ongoing growth and viability of minority financial institutions by allowing them to participate in the consolidation of banking currently being undertaken by the regulators. The last point I would like to cover concerns the practices of local governments with respect to their investment of funds. It is important to note that in many cases, a good portion of the local long term money is deposited outside the local economy. This may be done due to slightly higher interest rates as well as other factors. However, if this money is not deposited in banks within its own city, local banks cannot use this money to fund loans and circulate the funds back through the community in order to revitalize the cities. Therefore it important for the city to bring the funds back to the local banks, forcing the banks to do more lending within the inner city. The type of policy which removes the investment of the city's money from the city itself, particularly in an urban area, is shortsighted. I would like to thank the Committee for providing me this opportunity to testify here today. TESTIMONY OF SERAFIN U. MARIEL NEW YORK NATIONAL BANK Good morning, Mr. Chairman and members of the Committee. My name is Serafin Mariel, and I am the President and Chief Executive Officer of New York National Bank-a ten-year old minority-owned commercial bank headquartered in the South Bronx and, sadly, the only minority-owned bank in the entire State of New York. I am pleased to be testifying before you on the matter of Forcing Capital Formation-and I have no apology for the word FORCING in the title and theme of these remarks. The scarcity of capital within the Hispanic and African American community is well known. We must make the nation's commercial banking industry more responsive to the financing needs of minority-owned businesses, and we must encourage the nation's giant banks to make capital investments in minority-owned banks. About New York National Bank Let me tell you just a bit about New York National Bank. In addition to our South Bronx headquarters location, we have a branch in the South Bronx and a branch in East Harlem. All three of our locations are successor sites to what had been branches of giant banks. In fact, the theme for our tenth anniversary year is-10 Years of Banking Where Banking Wouldn't be! Unfortunately for the Hispanic and African-American neighborhoods of New York City, however, our three locations are exceptions to the norm in inner-city banking. Dozens of inner-city neighborhood branches of the giant banks in my city have become "strategically unattractive" and are now closed. And shuttered, former bank locations are common and ugly sites in inner-cities across the nation. New York National Bank is owned by some 240 shareholdersmostly Hispanics and African-Americans, and mostly South Bronx and East Harlem residents and business owners. My not-white face-this face before you today—is that of a New York City-born Puerto Rican, who was raised by his grandmother in Manhattan's El Barrio just a few blocks from a branch of Manufacturers Hanover, which today is our East Harlem branch. Had I been accompanied here today by our Chief Lending Officer, you would have seen another dark face-that of a Missouri-born African-American. And had our full Board accompanied me you would have met an equal number of African Americans and Hispanics. The composite of the complexions of the fifty people who make up the entire staff of the bank and the thousands who bank with us are far darker than the composite of faces found in such chambers as the United States Senate and board rooms and executive dining rooms of major banks and Corporate America. Our mission is two dimensional: One dimension, as our 10th Anniversary celebration theme states, is to provide a continuation of |