fi'\lGRESS|ONAL . % % M % M ESEARCH SERVICE A ‘A . . 1 Universi of isso llllllllllllll mm 103 olubia . W lllllllll lllllll 79 2 861 ITliil7 CONGRESS % . » % % % . 3' A 010- NATIONAL DEVELOPMENT BANK (ARCHIVED-O3/14/79) ISSUE BRIEF NUMBER IB77104 AUTHOR: Winters, Philip D. Economics Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SERVICE "MAJOR ISSUES SYSTEH DATE ORIGINATED ggggzgzz DATE UPDATED 93413112 FOR ADDITIONAL INFORMATION CALL 426-5700. 0501 cns- 1 IB77 mu UPDATE-O 3/1a/79 I°§Q§-2§£2fllIlQE The national development bank (NDB) proposals envision methods of providing long-term, low-cost capital to State and local governments and private firms to finance projects to assist or revitalize communities and depressed areas throughout the country. The exact nature, structure and purpose of the bank varies from proposal to proposal. In a number of cases, the bank would be established as an independent Federal government corporation, run by a board of directors appointed by the President and capitalized by the Treasury or a public~ sale of stock. Limits would be placed on the interest rates the bank could charge for loans or guarantees. Limits would also exist on the interest rates the bank would pay on outstanding stocks or bonds (dividends). The U.S. Treasury would subsidize the loans and the operations of the bank if it should run at a deficit. Supporters believe a NDB would be a viable method of correcting perceived capital market deficiencies which increase the financial problems of cities, towns, and distressed areas. Opponents argue that the NDB is an unwarranted involvement in the orderly workings of the capital market and would create an inefficient allocation of the Nation's supply of capital. The Administration's urban policy proposed a limited National Development Bank that would be controlled by the Department of Housing and Urban Development (HUD), the Commerce Department, and the Treasury. This NDB could: make guaranteed loans to business; provide small grants; make interest rate subsidies; and would establish a new class of taxable industrial development bond. The assistance would only be available in designated distressed areas. In early 1979 the Administration dropped its proposal for an independent, nited national development bank. Instead parts of the NDB proposal, the loan guarantees, the interest subsidy, and the secondary market, would be included in an enlarged and reorganized Economic Development Administration (FDA) business loan program along with business loan programs of the Department of Agriculture (USDA) and the Small Business Administration (SBA). whether these changes will be included in new enabling legislation for EDA or introduced separately or additions and amendments to EDA's program is still bemdecided. §A-§§BQQ§2-AE2-£QLlEX-A£AL1§l§ In the current, mostly market, method of capital allocation, the preception of risk by lenders toward borrowers, along with other relevant factors such as inflation and the demand for and supply of capital, determines interest rates. The national development bank proposal would alter this allocation procedure, at least for the potential users of the HDB. Instead of using the risk factor as the decisive determinant of the cost of the loan, the lender (in this case the NDB) would use other factors to determine the cost (interest) to the borrower. These other factors might include perceived social need, economic objectives such as employment goals, ‘ or economic development of distressed areas. The allocation of some portion of the Nation's capital supply would be removed by a NDB from the traditional factors of market control. The Federal Government's role as an allocator of I capital, which is currently carried out through existing Federal loan and 5 lrantee programs, would be expanded. The national development bank concept is often seen as being modeled after the Reconstruction Finance Corporation (RFC), created in 1932. In the 19305, cBs- 2 IB77104 upn1ma—o3/1n/79 ‘Hos, and early '50s, the Reconstruction Finance Corporation assisted financial institutions, business enterprises, and agricultural organizations. The RFC provided capital to Federal agencies and State and local governments to finance public works construction to provide jobs and infrastructure to c ‘munities throughout the country. The aid during the Depression was, in part, an effort to provide funds at a time when capital markets were in disarray. It was an attempt to prevent the worsening of the Depression as well as an effort fto provide jobs through the construction of public facilities. Later efforts of the RFC were directed toward war production, housing, and small business development. The conditions under which the RFC was established and operated are strikingly different from those that exist today. Then it was a time of severe depression: a guarter of the work force was unemployed; businesses were failing; the capital market was in a state of collapse. The failure of the capital markets meant productive, profitable businesses were faced with failure because of their inability to secure needed capital at reasonable rates. Even States and local governments found it difficult to borrow needed funds. within this context a Federal Government organization that acted as a source of credit for banks, businesses, agriculture, and the various levels of Government appeared reasonable. CAPITAL IS AVAILABLE Today's conditions are different. Unemployment, although a problem, is much less severe. Its effects are tempered by unemployment insurance and other social welfare programs. Business and bank failures are not a major problem affecting the economy. Economic growth continues with total e wloyment and income rising. A few areas of the country, some rural, some u-oan, are economically distressed with high unemployment, stagnant income, and declining business activity. Inflation is also a problem which causes -consumer uncertainty and business indecision. Capital is available to enterprises, individuals, and governments who can afford the current level of interest and who have the necessary credentials of credit-worthiness. These economic conditions are the background against which. a discussion of a national development bank, or a new reconstruction finance corporation, takes place. Supporters of the NDB or the new BBC argue that although the capital markets have not collapsed as they did during the Depression, the markets don't work well enough and leave many worthy borrowers without access to credit. According to supporters, small communities, some large, older cities, and businesses in inner cities and rural areas are unable to obtain conventional financing at a reasonable price because of their size, lack of credit credentials, the condition of their physical plant, or their location. There is a concern among supporters that unless something is done, many of the distressed areas of the country will face increasingly severe economic and social problems. The high rates of unemployment and physical decay in inner cities, the loss of sources of employment and the lack of community vfacilities in many rural areas are conditions the national development bank, it is hoped, could help remedy. The national development bank would be established to fulfill the loan requests of this group of borrowers. other ” development bank proposals would fund specific activities such as energy < xservation or solar energy development. In general, the EBB would make or guarantee loans as a lender of last resort at low, subsidized interest rates, although some supporters believe the banks will be able to make a profit whether or not it receives an annual subsidy. CRS- 3 IB7710H UPDATE—03/13/79 V AN INTRUSION IN THE CAPITAL HARKETS Opponents of the idea feel the NDB is an unnecessary and harmful intrusion l ;o the generally smooth operation of the capital markets. They believe that those who can't get conventional financing are not victims of imperfections in the market but are unable to compete in the markets because they are high risk borrowers or their enterprises are too fragile or unprofitable to afford the interest costs. There is also the practical problem of who would be squeezed out of the capital markets if a significant portion of the total capital markets’ funds were reserved for the use of the development bank. The original RFC didn't encounter this problem initially because, for a while at least, there were few other borrowers or lenders in operation. The small number of active borrowers and lenders then in existence does not match the current situation and is unlikely to in the near future. It is also argued that many of those eligible to borrow from .the proposed development banks can obtain funds, either grants, lonas, or loan guarantees, through existing Federal programs, such as the Small Business Administration, the Economic Development Administration, Community Development Block grants, and the Revenue Sharing programs. If there is a need for additional funds, they can be provided through larger appropriations for these programs without establishing a new agency. APPEARED IN LATE 19605 Development bank bills first appeared in Congress ‘in the mid to late 1960s. Early versions of some bills proposed urban development banks (H.R. 7916, 90th Congress) to alleviate the problems cities had in participating in ‘1 2 credit markets. Perceived shortages in the capital markets made borrowing unsually difficult and expensive at that time. This situation contributed to the exclusion of individuals, businesses, and State and local lgovernments from the credit markets. In particular, some cities and towns found it difficult, expensive or impossible to sell municipal bonds and sought relief from the Federal Government. The proposed urban development bank was one response to this demand. By providing funds at low interest rates for long terms to communities that had exhausted all possible Lsources of credit, it was hoped the financing problem would be alleviated, if not solved. The development banks would also engage in other lending activities such as venture capital and business loans in depressed inner and older cities. « ‘ Various types of development bank bills were introduced in various Congresses (from the 91st to the 95th). Among the bills introduced in the 95th Congress were ones for a rural development bank [s. 1630 (Humphrey)], a national or domestic development bank [H.R. 1683 (ninish), vH.R. 23u5 (Rangel), H.R. 7823 (Badillo), H.R. 8562 (noorhead), S. 1396 [Humphrey)], and a new reconstruction finance corporation [H.R. 2739 (whitten)], which was based on the Government corporation established in the early 1930s. In late , July, 1977 the Joint Economic Committee held hearings on financing municipal needs which dealt, in part, with urban development banks. In October and November of 1979 the House subcommittee on Economic Stabilization held hearings on some of the domestic development bank bills. other types of development banks bills have included those intended to establish: an energy development bank to finance energy conservation and development acitvities (H.R. 1860, 93d Congress); a solar energy development CBS- Q IB77104 UPDATE-03/1Q/79 bank to finance conversion to and research in solar energy (H.B. 7800, 95th. Congress); and a regional capital development bank to provide venture capital in areas of the country that are economically distressed (H.R. 1675, 95th Congress); The Administration revealed its urban policy proposals on March 27, 1978. As expected, a development bank was included. The proposed bank would be able to guarantee $11 billion in loans over the next three years which would go to business locating or remaining in economically distressed areas. Eligible businesses would be able to obtain 75 percent financing through the bank, the possibility of another 15 percent through either expanded Economic Development Administration or Department of Housing and Urban Development grant programs, and they remaining 10% must be financed through private channels. The bank would not make direct loans and would not provide assistance to local governments. The Administration's bill was introduced in late June reflecting these proposals (H.R. 13230 and S. 3233). Hearings were held by the House Subcommittee on Economic Stabilization in early August, 1978. No further action was taken on these bills in the 95th Congress. The Carter administration changed its tactics on the NDB in early 1979 by deciding to include parts of one NDB in an enlarged and reorganized business loan program of the Economic Development Administration. In addition to getting the loan guarantee, interest subsidy, and secondary market parts of the HDB, EDA would also receive the Business and Industrial Loan Guarantee program from the Farmers Home Administration and the development company loan programs from the Small Business Administration. The grant funds related to the NDB will go to EDA and EDD as originally proposed. It is unclear at this" point whether the proposals will be presented as amendments to the current legislation or included in new enabling legislation required for EDA this year. L§§I...1-.A2.3EQ.!! 0.5. Congress. House. Committee on Banking, Finance and Urban Affairs. Subcommittee on Economic Stablization. National Domestic Development Bank Act. Part I. Hearings, 95th Congress, 1st session. Oct. H, 5; Nov. 1, 1977. National Domestic Development Bank Act. Part II. Hearings, 95th Congress, 1st session. Dec. 12, 13, and 14, 1977. Washington, 0.5. Govt. Print. Off., 1977. 392 p. ----- To establish a national development bank. Hearings, 95th Congress, 2d session. Aug. 1 and 2, 1978. Washington, 0.5. Govt. Print. Off., 1978. 607 p. 0.3. Congress. Joint Economic Committee. Subcommittee on Economic Growth and Stablization and Subcommittee on Fiscal and Intergovernmental Policy. Financing Municipal Needs. Hearings, 95th Congress, 1st session. July 28, 1977. Washington, 0.5. Govt. Print. Off., 1977. 79 p. 0.5. vcongress. Joint Economic Committee. Subcommittee U.S. cns- 5 1B771ou UPDATE—03/14/79 on Fiscal and Intergovernmental Policy. Keeping Business in the City. Hearings, 95th Congress, 2d session. Mar. 6 and 7, 1978. Washington, U.S. Govt. Print. Off., 1978. 189 p. Congress. Senate. Committee on Banking and Currency. subcommittee on Financial Institutions. Financial institutions and the urban crisis. Hearings, 90th Congress, 2d session. Sept. 30 and Oct. 1-fl, 1968. Washington, 0.5. Govt. Print. off., 1968. #70 p. Congress. House. Committee on Banking and Currency. Subcommittee on Housing Panels. Wanted: two Federal levers for urban land use -— land banks and urbank. In papers submitted to the subcommittee by Charles H. Haar. June, 1971. Washington, 0.5. Govt. Pritt. off., 1971. p. 927-9&6. At foot of title: 92d Congress, 1st session. Committee print. Committee on Banking, Finance and Urban Affairs. Subcommittee on the City. Toward a National Urban Policy. 95th Congress, 1st session. April 1977. Washington, U.S. Govt. Print. off., 1977. 1&3 p. Committee print. QEROEQLQGY .Q.1?.-.1i-'?..13.L‘.I§ / 08/03/78 -- The House Subcommittee on Economic Stabilization 12/12 10/04 07/28 Bears Kane, began 2 days of hearings on H.B. 13230, the Administration's National Development Bank bill. /77 —— The House Subcommittee on Economic Stabilization began 3 days of hearings on various national domestic development hank bills. Part two of earlier hearings.g -05/77, and 11/01/77 -- Hearings by the House Subcommittee on Economic Stabilization on various national domestic development bank bills. /77 - Hearings held by the Joint Economic Committee on municipal finance. some of the testimony dealt with domestic development banks. e, Peter J. (ed.). Mobilizing Capital for Economic Development: Institutional Innovation and the New Urban Policy: papers and proceedings from a conference held at Princeton University, Apr. 22, 1978. J 9 Princeton, The Center for New Jersey Affairs, Woodrow Wilson School of Public and International Affairs, August 1978. 377 p. Joseph A. Development banking: an economic appraisal. cns— 6 IB771ou UPDATE-O3/10/79 Lexington, mass. Lexington Books, D.C. Heath and Co., 1975. 217 p. Lewis, Peter. The case for the urban development bank. In financing State and local government: proceedings of the monetary conference, June 1u~16, 1970. Boston, The Federal Reserve Bank of Boston, 1970. p. 159-187. Mitrisin, John. Economic development banks. A look at two ,recent proposals. Washington, Congressional Researc Service, Dec. 7, 1973. 20 p. ' Smith, Edward K. A proposal for a development bank for the United States. Economic Development Administration, Washington, D.C., Office of Economic Research. Feb. 1977. U.S. Office of the Secretary of the Treasury. Final report on the Reconstruction Finance Corporation. [Prepared under the direction of Lawrence B. Robbins] Washington, U.s. Govt. Print. Off., 1959. 321 p. winters, Philip. A comparison of domestic development bank bills introduced in the first session of the 95th Congress. Congressional Research Service, Feb. 27, 1978. 29 p. --r-- Description of the Administration's National Development Bank Bill (H.B. 13230 and S. 3233) Congressional Research Service, Aug. 15, 1978. 13 p. LIBRARY OF WASHINGTON UNlVEE'3?SlT‘Y ST. LOUIS - MO.