Shorebank: Too Good to Fail?

Stanford Social Innovation Review Fall 2011

“On Aug. 20, 2010, the Illinois Department of Financial & Professional Regulation closed ShoreBank, the nation’s first and leading community bank, and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The closure was not unexpected. Reports of the bank’s problems—and a potential rescue—had been circulating for months. But the closure brought to a bitter end an iconic example of progressive social enterprise.”

ShoreBank was 37 years old. This article takes a first look at why ShoreBank failed recognising that the full answers will take years because various economic, governance and political factors are involved with varying degrees of influence. The article also extracts lessons for the social enterprise community from both ShoreBank’s record of success and its closure.

ShoreBank Corporation was iconic in the States in that it inspired the growth of Community Development Financial Institutions (CDFIs) through the success of its for-profit bank subsidiary which had more than $4.1 billion in mission investments and more than 59,000 units of affordable housing. It also worked with Muhammad Yunus to capitalise the Grameen Bank. For almost four decades it created social value and modelled innovation. Its dual mission of joining regulated banking activities with traditional economic development activities was radical in the nineteen-seventies.

Interviews with two of the founders and others familiar with its history and activities have informed this first analysis.

The article examines as factors contributing to its collapse:

  • Whether ShoreBank was simply a victim of GFC realities;
  • Whether management errors (including ineffective risk management) and misjudgements by regulators made the bank vulnerable;
  • Why it was not seen as “too big to fail”;
  • The “toxic politics”: political pressures on the vote against extending specific rescue funding which President Obama had approved as being for CDFI banks which targeted more than 60 percent of their activities to underserved communities as ShoreBank did.

In summary the lessons learnt thus far are:

  • Creating social value for the community came at the financial cost of the extended time it took to reach a breakeven point;
  • Lower deposit minimums (designed to create greater access) meant smaller account balances than the industry average;
  • The loan business had smaller average transaction sizes and therefore smaller fees earned despite requiring the same administration time as larger loans yielding bigger fees;
  • Mission remained important throughout with ShoreBank’s social investors sharing the commitment that their investments were for social purpose returns not for maximising the return on their capital;
  • Nevertheless this small number of mission-aligned investors created long-term structural issues in that none of them had any liquidity for their shares and ShoreBank needed ongoing access to growth capital;
  • ShoreBank’s growth created internal challenges: heavy travel schedules of the founders and a management structure that required a high level of direct supervision;
  • It had proven difficult over ShoreBank’s life to attract and hire future leaders who had both top banking skills and a commitment to social values.
  • When knowledge of “problems” becomes public “toxic” partisan politics can intrude and work against sensible solutions.

The article concludes with the view that ShoreBank’s legacy lives on in the community development banks it inspired and in the acceptance of the aussie casino notion of dual missions.

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