William C Dudley: Fostering economic growth in the Bronx
Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal
Reserve Bank of New York, at the 17th Annual Bronx Bankers Breakfast, Bronx, New York
City, 8 May 2015.
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I am very pleased to have the opportunity to join you today at the 17th Annual Bronx Bankers
Breakfast. I would like to thank Bronx Borough President Ruben Diaz, Jr., the Business
Initiative Corporation of New York and the Bronx Overall Economic Development Corporation
for the opportunity to speak about the economic outlook for the Bronx. This is my second visit
to the Bronx in the past five months. When I was here last December, I had the opportunity
to hear from various community and business leaders about what they were seeing and the
issues they were facing. Such visits are an important part of the New York Fed's outreach
efforts to keep apprised of key developments in the Second District, and to identify areas
where we should be directing our attention.
In my remarks today, I will focus on the outlook for the Bronx, the important role that
community banks play in the local economy, as well as specific challenges facing local small
businesses. It is important to recognize that small businesses play a vital role in any
economy, so fostering economic and financial conditions that allow these businesses to
flourish is important to the health of the local economy. In light of recent developments, I am
optimistic about the economic prospects for the Bronx and local small businesses. I also
believe that community banks and community development organizations have an important
role to play in paving the way forward.
As always, my comments today reflect my own views and not necessarily those of the
Federal Open Market Committee or the Federal Reserve System.1
The economic outlook for the Bronx
To appreciate where we are, we need to remember where we've been. Those of you who are
long-time Bronxites know that starting in the 1950s, but especially during the 1970s, the
Bronx endured a massive economic slump. In that one decade, the 1970s, the borough's
population fell by 20 percent - and by even more in many well-established neighborhoods.
As people moved out in droves, buildings were abandoned, crime increased and jobs
vanished - all in a vicious cycle, creating an atmosphere of despair. Yet, the borough
persevered and conditions began to stabilize and then to even improve a bit in the 1980s.
Today, while there is still much progress to be made, the Bronx is in dramatically better
shape on many dimensions: its economy has been growing at a brisk pace, its population is
on the rise, its housing stock is being rejuvenated and many businesses are thriving, creating
strong job and income growth. This is particularly evident in neighborhoods like Hunts Point
and the area around Yankee Stadium, down to the Bronx Terminal Market and beyond.
Between 2007 - right before the last recession - and last year, employment grew by
10 percent in New York City, making it one of the best performing areas in the nation. In the
Bronx, employment grew even faster, rising by more than 14 percent.
While job creation in the Bronx has been quite broad-based, I would like to highlight two
particular industries, each very different in nature, to illustrate the diversity of Bronx's
economy. Both health services and wholesale food distribution have been flourishing here.
These sectors, on average, pay relatively well and both have been contributing strongly to
overall job creation and to the borough's economic resurgence. By health services, I don't
just mean hospitals and clinics serving the local population. For example, Montefiore Medical
Center is a nationally-ranked institution in a variety of specialties as well as a highly regarded
teaching hospital. Additionally, the Albert Einstein College of Medicine is a graduate medical
school and clinical research facility. And, of course, the Hunts Point Food Distribution Center
houses institutions such as the Fulton Fish Market, which moved here from lower Manhattan
about a decade ago.
But, of course, these aren't the only industries driving the Bronx economy. Just last
November I visited OnForce Solar, an installer of solar heating systems located in the Port
Morris section of the South Bronx. There has also been a great deal of retail development
over the past decade - most notably, perhaps, the Bronx Terminal Market just south of
Yankee Stadium.
A little known fact is that, on average, jobs pay more in the Bronx than in any other of the five
boroughs, except for Manhattan. And my regional economists assure me that it's not just the
Yankees that bring up the average, although they do make a difference.
This, of course, is not to say that all is well in the Bronx. Its poverty rate and unemployment
rate are both roughly twice the national average, and higher than in any of the other
boroughs. While crime has fallen dramatically over the past two decades, it also remains
higher than in the rest of the city. Debt is also burdensome for many Bronx residents.
Delinquency rates on household debt are relatively high, suggesting that many people are
financially "distressed."
All this makes it especially important to maintain the economic momentum that is improving
the quality of life in the Bronx. Community banks have an important role to play in this
process. Bank lending can help businesses - especially new and small businesses - expand
and grow jobs, and help residents invest in improving their homes, neighborhoods and
communities. Lending to small businesses and entrepreneurs requires deep knowledge of
local business conditions and potential borrowers, both of which community banks have a
comparative advantage in acquiring. Former Chairman Ben Bernanke in a 2012 interview
summarized this point quite well. He stated that "community banks have the capacity to
respond with greater agility to lending requests than their national competitors; they have
more detailed knowledge of the needs of their customers and closer ties to the communities
they serve."2
Given this critical role played by community banks for localities such as the Bronx, it is
important to ensure that the local banking sector remains vibrant. The financial crisis offers
important lessons for community banks in this regard.
Lessons for community banks from the financial crisis
America's banking system began with community banks, and today they continue to play a
critical role in the financial system. However, the number of commercial bank charters has
declined by 50 percent since 1985, with the recent financial crisis contributing to this decline.
A total of 417 banks and thrifts failed between 2006 through 2011.3 Many community banks,
though, not only survived but also thrived during the crisis. Why? What sets those banks
apart from others that failed, or that survived but did not thrive? What were some common
characteristics across the successful banks? These characteristics are undoubtedly
important and will be an essential element of success in the future.
Some factors that one might think are important turn out not to be critical in determining
performance. For example, asset size was generally not a factor in performing well during,
and following, the financial crisis. Community banks that thrived varied in asset size - from
below $50 million, to as large as $10 billion in assets. Geography, though, did matter to a
degree. By definition, community banks are not geographically diversified, so those located
in states that were most severely affected by the financial crisis and the recession faced the
largest challenges. However, there are examples of banks that performed well in Michigan
despite the severe economic problems that Michigan experienced; and there are examples
of banks that floundered in Texas despite the solid economic performance that Texas
experienced. Here in the Second District, while we had relatively modest declines in real
estate values on average, some local areas saw house price declines as serious as in the
worst hit states such as Arizona, California, Florida and Nevada.
Recent research has identified several characteristics common to community banks that
prospered during and following the financial crisis.4 First, thriving banks exercised a
comparatively conservative growth strategy during good times, with a management culture
that focused on long-term franchise value and not short-term profitability. Successful banks
had lower concentrations in commercial real estate lending generally; and much lower
concentrations in construction and land development loans specifically. While profitable
during the boom, these loan categories suffered the greatest losses as real estate values
declined and the recession set in. As the boom progressed, the more conservative
underwriting standards of successful banks led to declines in their market shares as other
banks competed for business by relaxing their standards. However, successful banks were
able to gain back this market share and then some after the bust due to the relative strength
of their balance sheets. The successful community banks were patient and conservative
regarding investments - desiring reasonable, sustainable returns, not necessarily
"spectacular" returns. It seems that their managers devised their business plans heeding
Friar Lawrence's advice to Romeo as he devised his courtship plan for Juliet: "Wisely and
slow; they stumble that run fast."
Other noteworthy characteristics also identified in this research were an engaged board of
directors, talented staff who were familiar with the community, sound senior management
oversight and thorough due diligence before offering a new product or service. The studies
further cited successful community banks as having a strong and localized customer service
focus - that is, avoiding the temptation to expand into new, less familiar areas and markets -
and high community visibility, with staff members heavily involved in community activities,
which in turn, created customer relationships built on trust.5
So what did we learn from the experience of community banks with the financial crisis? A
foundation built on good risk management practices and intimate local knowledge helped the
successful banks to thrive during one of this country's most difficult financial periods. The
banks that prosper in the future will likely have characteristics similar to those that
outperformed during the financial crisis. It bears repeating that community banks are critical
in keeping local economies vibrant and growing. Strong community banks are essential to
the provision of credit to small businesses in their localities.
Importance of small business lending
It is often noted that small businesses contribute disproportionately to employment growth in
their communities. When you dig a little deeper into this stylized fact, you discover that it is
new small businesses that are responsible for this growth. Upon reflection, this makes sense
given that, by definition, old small businesses are not growing. If they had been growing fast,
they would no longer be small. A related fact is that the failure rate is quite high for new small
businesses. Taken together, this implies that it is important to provide an environment that is
conducive to new business formation. The more new businesses that are created, the more
that have a chance of surviving and growing into larger, prosperous members of the local
economy.
On earlier visits in the District, I heard several small business owners voice their concern
over their ability to access credit. Based on these conversations, I asked my research staff to
investigate the degree to which they could substantiate with data whether Bronx small
businesses seem credit-constrained relative to other boroughs or relative to other
comparable counties across the country. They first looked at the share of small business
loan amounts made in each borough relative to the share of small businesses located in
each borough, using data for 2013 (the latest available at the time). If small business credit is
equally available, then we would expect to see ratios of approximately one for each borough.
What the data show is that the ratio is well below one for the Bronx and Staten Island, with
the Bronx being the lowest. This is consistent with what I heard during my last visit.
Broadening the lens of the analysis, my staff then compared the Bronx to a random sample
of comparable low income counties that were located in urban areas, again using data for
2013. They looked at the ratio of the volume of small business lending per small business.
The ratio for the Bronx was $9,900 as compared to a mean ratio of $10,400 across the
sample of other counties. While lower by $500, this difference is not large. Taken together,
the evidence suggests that while access to small business credit in the Bronx seems more
constrained relative to Brooklyn, Manhattan and Queens, it is relatively consistent with what
is typically available in lower income counties across the country. Of course, this may simply
indicate that small businesses in lower income areas of the country are generally constrained
in their credit access.
Another way to investigate the question of credit constraints is to look for evidence that would
reflect the consequences of these constraints. For example, more constrained access to
credit might result in a slower rate of new business formation. My staff analyzed small
business starts between 2010 and 2013. For the Bronx, the number of small businesses per
capita grew at a 12 percent rate over that period, double the average rate for the sample of
50 lower income counties. This evidence can be viewed in multiple ways. My take is that, in
general, it is difficult to prove or disprove the presence of credit constraints with the available
data, especially at the county level. In the case of the Bronx, we found evidence both for and
against the proposition. In either case, we take seriously the feedback from local businesses
that they perceive access to credit to be a problem. The question then becomes what can be
done to improve the situation going forward.
Not surprisingly, most loans to small businesses tend to be small. Microloans - defined
$100,000 or smaller - make up 90 percent of all loans to small businesses. These loans tend
to be labor intensive and costly to underwrite relative to the returns they generate. This
combined with the higher risk associated with these loans present challenges to banks.
Community development financial institutions (CDFIs) can help fill this space. CDFIs are
specialized financial institutions that target their efforts to areas underserved by traditional
financial institutions. They provide a range of financial products including capital for
investments to start-up or expanding businesses in low-income areas. Most CDFIs tend to be
nonprofit organizations, but some are regulated institutions such as community development
banks and credit unions. Examples of CDFIs operating in the Bronx include the Bronx
Overall Economic Development Corporation, the Bethex Federal Credit Union and Spring
Bank. However, CDFIs tend to make loans smaller than $50,000. A challenge, then, is
bridging the gap between the maximum loan amount typically provided by a CDFI and the
minimum loan amounts typically provided by a bank. Since the CDFIs have the relationships
with the small businesses, partnerships between banks and CDFIs that increase the lending
capacity of the CDFIs could be helpful. Possible avenues to achieving this include
partnerships between CDFIs and banks, as well as assisting CDFIs to better access funding
from the Federal Home Loan Bank (FHLB) system.
I would like to touch on three additional issues that I think would assist small businesses to
be successful: financial education, certification of community organizations that assist small
businesses and greater transparency for small business lending.
Establishing a thriving small business takes more than a good idea and hard work. While
both of these are essential, there are many other factors that come into play. It is important
that people starting businesses have access to financial information that will assist them in
navigating the difficult way forward. This assistance can include how to develop a sound
business plan, how to enhance their credit profile, how to avoid early pitfalls such as
obtaining financing with punitive interest rates and how to cultivate a banking relationship.
These will all increase the likelihood that the small business will have access to the credit it
needs over time to grow and thrive. CDFIs have been an important source of this financial
education to small businesses, and these efforts should be supported and expanded.
It is critical that small businesses also know that the organizations they work with are
reputable and knowledgeable. Unfortunately, there are individuals who try to take advantage
of owners of new businesses by providing them with poor advice or overcharging them for
credit. Researching the backgrounds of these service providers and lenders is difficult and
time intensive, leaving small business owners too often uncertain as to who to deal with. In
some cases, this uncertainty can discourage a business owner from seeking assistance.
I believe that we need a better system of certification for organizations that work with small
businesses. The certification will assure a business owner that the organization has been
properly vetted and has the requisite skills to assist the owner. This not only provides
assurances to business owners, but saves them the time and resources required to do this
due diligence on their own.
Finally, in addition to certification, it would be helpful to have consistent standards and
transparency requirements for organizations that lend to small businesses. Such standards
and requirements exist for lending to households, and I believe the same justification exists
to extend these requirements to small businesses. As a result, small business owners would
have greater confidence that they fully understand the terms and conditions of their loan.
This, in conjunction with the access to more financial information and education, will help
small business owners make better decisions about their use of credit.
Conclusion
In summary, economic conditions in the Bronx are improving but more progress is
necessary. Community banks will play a key role in spurring this progress, so it is essential
that they remain financially sound and engaged. The financial crisis provides many lessons
for how banks can thrive even in turbulent economic conditions. The vitality of the Bronx and
other communities depends on the ability of entrepreneurs to establish and grow new
businesses. While access to credit is important, success depends on a wide range of factors,
and we need to make sure new business owners have the help they need to prosper.