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Financial Industry Developments and Trends

This study's purpose is to examine whether and how community development finance institutions increase their impact individually and collectively by building on and learning from relationships with mainstream financial institutions. Changes affecting the community development finance field, notably reduced federal funding and greater focus on CDFI performance by potential financial partners, as well as dramatic changes in the mainstream financial sector, have brought CDFIs face to face with new strategic opportunities for working with the mainstream financial system. In the past, mainstream financial institutions and CDFIs were separated by the populations they served and the products they offered. The dominant sentiment within the community development finance field was that banks were the perpetrators of disinvestment, and the first partnerships between banks and CDFIs were greeted with suspicion and doubt. Over several decades, that thinking has changed almost completely. Today, development finance organizations have become fluent in the language of business and command more and better resources to accomplish their mission. Many have adopted risk-management and administrative practices resembling those of mainstream institutions.

At the same time, financial markets have evolved to securitize credits and supply liquidity to credit markets once considered too risky or obscure. Mergers, refined risk-modeling capabilities, and heavy reliance on specialized, outsourced services have impacted the role of mainstream financial institutions in supporting and financing community development and providing financial services in low- and moderate-income communities. Public-sector support of community development has come increasingly in the form of federal tax credits to induce investments by banks, other corporations, and individuals. Although CDFIs have not broadly adopted the tactics that have led to efficiencies and growth in the industry, today's community development finance industry is more integrated with the conventional financial system than ever before. The mainstream financial sector has become the most important source of funding for community development. These developments have blurred the line between mainstream and development institutions, at least in their support for community development.

 
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