randall s kroszner : developing sustainable capital for community investments speech by mr randall s kroszner, member of the board of governors of the us federal reserve system, at the community reinvestment fund first annual forum, minneapolis, minnesota, 21 april 2008. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * good afternoon. i am pleased to address the inaugural community reinvestment fund ( crf ) annual community forum series. the development of sustainable capital sources through innovation is an important goal for the community development financial institutions ( cdfi ) industry. today's host, crf, has played a pioneering role in the development of a secondary market for community development loans, a topic i spoke on more than a year and a half ago in washington, d. c. the financial markets have experienced much turbulence since that time. the turmoil in the subprime mortgage market, in particular, has affected liquidity of the larger secondary markets. given the cautious state of financial markets, how can the cdfi industry enhance the attractiveness of cdfi investments to private capital? the markets have changed, but the core ideas i raised in my previous remarks are more relevant than ever. there is a striking parallel with the challenges for the re - emergence of the subprime mortgage market and the adoption of innovations in the community development investments market. to overcome the unease of the current financial markets and attract a new source of capital, new market entrants must make particular efforts to reduce the uncertainty associated with their investment opportunities. for the cdfi industry, the challenges that need to be addressed are improving information about these products, developing models of risk and pricing, and standardizing these contracts. addressing these issues will be critical to jump - start sustainable private cdfi investments as well as to revive the subprime mortgage market. growth of community development finance and current challenges the community reinvestment act ( cra ) was enacted more than 30 years ago in response to deteriorating economic conditions in urban areas, particularly in lower - income and minority communities. the cra served as a catalyst in attracting innovative public and private investment capital into low - and moderate - income communities. consider the following : in 1991, 2, 000 community development corporations ( cdcs ) built 300, 000 units and 17 million square feet of commercial space. in 2006, 4, 600 cdcs built 1. 2 million units and

126 million square feet of commercial space. today, there are more than 600 cdfis with more than $ 19 billion in assets and with more than $ 20 billion of finance activities. the crf has issued three rated securities within the past six years totaling almost $ 200 million, opening the door to institutional investors and expanding the marketplace. the migration toward sustainable mainstream capital sources is important in light of budgetary challenges facing governmental and philanthropic funding sources. for cdfis to expand the scope and volume of their financing activities, they need to develop new products and innovations that tap more predictable sources of funding. accessing the broad depth of the capital markets as a self - sustaining funding source for community development would yield enhanced benefits, such as more - efficient delivery of capital, greater funding and underwriting discipline, and reduced finance costs. of course, a real challenge is building a bridge between the two very different worlds of capital markets and community development. the former requires strict market discipline, a rich set of data to assess risk and pricing, and standardization. the latter, community development, however, has a commitment to individuals and communities that have been left out of the economic mainstream and uses products tailored to their unique circumstances. these two worlds, however, can be brought together ; and that has begun to happen, particularly around the challenges i will discuss in greater detail. importance of data for new products and proper risk modeling when a new product is being developed, there is an initial experimentation phase in which market participants learn a great deal about the product's performance and risk characteristics. this phase involves gathering and processing information and modeling the performance of the product in various scenarios and under different market conditions. it may then take time for market participants to understand what, exactly, they need to know to value a product. during the early phases, a fair amount of due diligence is appropriate, given the greater uncertainty associated with innovative products. 1 in the initial experimentation phase, the terms and characteristics of a new product are adjusted in response to market acceptance – or lack thereof. during this period, market participants are seeking and providing information so that they can properly value the product, judge its potential for risk and return, assess its market acceptance and liquidity, and determine the extent to which the risks of the product can be hedged or mitigated. to do this, market participants must perform due diligence, a process to gather and assess relevant sources of information to evaluate that product. due diligence is