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Measuring Structural Impacts via Financial Output Variables

Many analytical approaches discussed so far might be aimed at determining whether CDFIs are having impacts on crosscutting social and economic outcomes – housing conditions, property values (which may indicate broader conditions), employment, income, or other phenomena.

However, there are reasons it may be useful to look at CDFI impacts on more intermediate outcomes – or even outputs – rather than at broader socioeconomic end outcomes. First, as one moves further down the logic model continuum from output to end outcome, it is harder to attribute outcomes to CDFIs because a greater number of other factors affect outcomes. For example, even if CDFI activity spurred the flow of capital to underserved Anns, it may be difficult to identify how many jobs should be attributed to the provision of this specific amount of capital. Second, CDFIs are likely to report output or intermediate outcome data than end outcome data. Moreover, if we are placing CDFI data in the context of data on other mainstream financial providers, it is less likely we will have data on end outcomes associated with such providers. Third, CDF! activity may have institutional or structural impacts on some segment of financial markets. CDFIs may encourage conventional lenders to behave differently. Banks may learn from partnering with CDFIs. They may discover that borrowers or projects they believed to be too risky were not so risky after all. Even if banks do not partner with CDFIs directly, just witnessing CDFI activity may change how a bank or conventional lender views or approaches a market.

Some argue that CDFIs are simply "gap fillers,” making loans banks are unlikely to make. As banks reach farther into less traditional market segments, such a model may imply a substitution from CDFI activity toward bank activity. Such a model would imply that bank activity and CDFI activity might be negatively correlated. Other models for the sector suggest that CDFIs influence the behavior of conventional financial institutions in ways that encourage these institutions to become more involved in the market segments targeted by CDFIs. Under such models, we might expect CDFI and bank activity to be positively correlated.

Anecdotally, this second model has often been associated with ShoreBank, a well-known community development bank. Prior to ShoreBank's targeted lending to multifamily apartment rehabbers in Chicago's South Shore in the 1980s, few conventional lenders appeared interested in funding low- and moderate-income projects (Goldwater and Bush 1995). After the bank fostered this market and the scale of rehab activity grew, larger, conventional lenders became much more active.

To have institutional or structural impacts, CDFIs may need to reach some minimum scale in a product fine. Scale may matter for reasons beyond just the ability of CDFIs to deliver more capital to the target firms or households. Scale matters because CDFIs become substantial enough to affect lender behavior. Mainstream lenders are affected by a complex set of forces that are derived, among other things, from regulatory obligations, reputational concerns, policy debates, and their involvements in corporate and civic life.

Structural impacts might best be detected at the level of financial market areas, such as at the level of metropolitan areas or counties. These market areas are similar to the geographical areas that the Federal Reserve and other agencies use for evaluating competition in considering mergers and acquisitions. The general approach to such a study would be to measure CDFI activity in a particular product line across a large number of metropolitan areas. Because CDFIs may be more likely to operate on amore substantial scale in central cities, however, it may make more sense to use central cities (each within its unique metropolitan market area) as the geographic unit of analysis. Mainstream financial institution (banks, finance companies, etc.) activity in closely related product lines would be measured for each city. Models would be developed to explain the level of desirable financial end outcomes that CDFIs might encourage.

Another method for potentially testing for the influence of CDFI activity on mainstream financial institutions would be to develop measures of financial product innovation among CDFIs and banks or other mainstream lenders. Retrospective historical analysis of innovations in product design, pricing, or terms could identify whether new products and terms introduced by mainstream lenders were preceded by similar products or terms developed by CDFIs.

 
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