Does ShoreBank’s Seizure Represent a Failure in CSR?

On August 20th, CSR took a hit when the community development bank ShoreBank was closed by the FDIC.  While the company is reopening under the name Urban Partnership Bank, it is unclear to what extent the new entity will embody the principles that had underscored ShoreBank’s reputation as a pioneer in corporate social responsibility.  This episode opens the door for some good conversation about whether banks formed around social missions can succeed in an economic climate where even less principled financial institutions are facing financial challenges.

ShoreBank was founded in 1973 “to demonstrate that a regulated bank could be instrumental in revitalizing the communities being avoided by other financial institutions.”  Its website explains that in 2000, “ShoreBank expanded its focus to include environmental issues, believing that communities cannot achieve true prosperity without also attaining environmental well-being.”  In addition to being known for its affiliations with Obama, the bank was widely recognized for its innovative approach and lobbying on behalf of community development activities.

It is interesting to think about ShoreBank juxtaposed with other banks that have failed within the past two years.  ESG analysts have had a field day rubbing salt in the wounds of major banks that have gotten their just desserts after years of profiting off the backs of the poor.  The premise is simple: that the more unsavory a bank’s practices, the higher its exposure to risk.  And wouldn’t it be logical to assume that the converse is true--- that companies embracing ethical practices lower their risk and optimize their chances for success?

Sadly, the ShoreBank seizure serves as a reminder that CSR doesn’t always equate to low risk.  If anything, ShoreBank was an example of an entity that took on significant risk to improve society.  According to Socialfunds.com, its business model--- which relied on its ability to manage a portfolio of loans to entities that other banks would not have dared risk--- resulted in a default rate higher than what the bank could stomach, even despite the education program it had put in place that had previously kept its default rate below those of commercial banks.

But are there other reasons that may have been overlooked?  ShoreBank’s efforts had been ambitious, including geographic expansion into several U.S. markets, support of Grameen Bank, and even involvement in environmental issues.  Is it possible that mission creep got the better of a great institution?  That a lack of focus prevented it from succeeding at what it initially had done so successfully?

There will undoubtedly be people who suggest that ShoreBank’s seizure bodes poorly for community development banks, and more broadly for corporate social responsibility in the banking industry.  But before jumping to conclusions about what this means about CSR in banking, it would behoove us to consider whether other factors contributed to this situation.

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