Some government programs fly below the radar, but that doesn’t mean they aren’t effective. Of interest here is the Emergency Capital Investment Program or ECIP, a Treasury program announced in the spring of 2021 that is aimed at reducing wealth disparity by opening up the flow of capital to underserved communities disproportionately impacted by the economic effects of the Covid-19 pandemic.
The $8.75 billion program is at once a small and large initiative. It’s small relative to other government programs, such as the CHIPS Act, which sets aside nearly $380 billion to bulk up the U.S. semiconductor industry.
But ECIP is large too when looked at from a broad-brush level. With many banks maintaining a reserve requirement of 10%, the $8.75 billion in fresh capital stands to deliver nearly $90 billion in new lending. Now that’s a program.
Concentrations and Limitations
But as with so many government programs, questions linger about its structure and its design. The list of minority-owned depository institutions (MDIs) and Community Development Financial Institutions (CDFIs) that were approved to receive investments from the Treasury within the program suggests that participating banks are geographically concentrated. Of the approximately 101 banks participating in the program, 78 are in the southeast and southwest. Mississippi alone accounts for 29 of these banks, or almost a third to the total. Credit unions, of which there are 85 were excluded from this analysis because of their narrow focus.
On one hand, banks offer an effective mechanism for distributing capital. Their branches reach deep into the geographies they serve. But this also results in a shortcoming. Many of the banks in the programs, are regional, if not local. Further, there are few, if any national banks in the total. Notably missing: Citi, J.P Morgan and Bank of America are notably missing.
What’s needed are institutions that operate without the restrictions of state and federal charters. These institutions exist. More on that later.
But the larger challenge according to Tafara Jhamba, Chief Operating Officer of New York City based Founder’s Impact, a Specialized Small Business Investment Company, is not where capital is distributed, but to whom. “Under the Equal Credit Opportunity Act or ECOA, banks are limited in their ability to collect information about race”, he said.
Jhamba added, “ECIP offers a safe harbor of sorts for banks to collect this information, but borrowers are not obliged to disclose information about their race, or for that matter gender, religion or national origin, among other qualifiers.”
Casting A Wider Net
He notes that the net impact of these limitations is that it will be difficult for the Treasury to measure the impact of the ECIP program. “While the ECIP, at $8.75 billion offers a notable commitment, the financial leadership advocating for minority communities, wants a successful program can attract even more capital.”
According to Jhamba, Small Business Investment Companies, and so-called specialized Small Business Investment Companies, can supplement the reach of ECIP and offer some advantages banks cannot.
Small Business Investment Companies or SBICs make debt and equity investments in small businesses using their own capital and with funds they have borrowed at favorable rates through the issuance of SBA debentures. Specialized Small Business Investment Companies or SSBIC’s are the same, but with a mandate to channel funds to economically or socially disadvantaged business owners.
One of the key differences here is one of geography. SSBICs and SBICs do not suffer the limitations that state chartered MDI and CDFI banks do. For instance, they are able to easily fund businesses in say, Nevada or Arizona, where currently, no approved ECIP banks are headquartered.
Optimizing Incentives
As expected, the ECIP program provides incentives to approved institutions to enhance the program. Chief among these is a rate reduction on the cost of the bank’s ECIP funds for so-called qualified lending. Qualified lending means the distribution of capital to target communities as defined within the program, with Deep Impact being the most impactful types of qualified lending including to minority borrowers, persistent poverty counties and deeply affordable housing.
Jhamba notes while these incentives are well designed, they fall short, if the ultimate goal is to get capital where it’s needed most. The incentives may result in delays to the distribution of capital he says. Moreover, while the incentive is attractive — offering the prospect of cutting the cost of ECIP funds by up to 75%— it is largely inaccessible for many small businesses that do not meet traditional bank underwriting criteria and particularly for minority-owned businesses which are starved for equity-like capital, not just loans.
“Banks are conservative by nature, as well they should be,” says Jhamba. “But this caution permeates their culture and inhibits their ability to make some of the most needed and impactful kinds of investments that would be in line with the intention of the program.”
A Deep Impact
One strategy to distribute the ECIP funds more effectively would be the introduction of an intermediary. In finance, there are multiple examples of intermediaries bringing efficiencies to the markets. Regional federal reserve banks, mortgage brokers, market makers and specialists, among others are good examples.
In this regard, a long-standing SBA program, Small Business Investment Companies (SBICs), and Specialized Small Business Investment Companies (SSBICs) may offer just the right salve. Founder’s Impact, headed by Jhamba, is an SSBIC, with the specialized modifier denoting that SSBIC are chartered to make investments in minority-owned enterprises.
Under this scenario, participating ECIP banks invest their ECIP funds into an SSBIC — which is currently allowed under the ECIP.
But, Jhamba says that many features of the SBIC/SSBIC program dovetail with the goals of the Treasury’s ECIP. First, he says, the SBIC program was created in 1958 and is regulated by the Small Business Administration with the kind of oversight that will offer ECIP banks the confidence to redirect their funds to a third party.
Next, SSBICs can identify and channel ECIP funds where they are needed most chiefly because their existence is predicated on serving the needs of disadvantaged populations, and they know where these populations are and how to invest in them in ways banks cannot.
Further, Jhamba notes, that ECIP-banks have the opportunity to make follow-on loans in investees of the SSBIC, and participate in financings of the fund based on loan performance, thereby deepening the available pool of capital available to disadvantaged populations. And here, incentives might be created so that financings made by an SSBIC backed with ECIP funds from a participating bank, count toward their rate reduction lending activities.
Next, SSBICs and SBIC have access to additional funds in the form of SBA debentures, leveraging the capital that comes to them when an ECIP approved bank invests in the fund. “If the goal is to make capital available to disadvantaged populations,” says Jhamba, it’s important to create the largest possible pool of capital.”
Finally, unlike banks, SSBICs are set up to make equity investments as well as loans. One of the underlying reasons minority and other disadvantaged businesses struggle is because they are financed almost exclusively by debt due to multiple systemic barriers that constrain their ability to obtain equity investments. A layer of equity capital can businesses scale and materially create wealth in these traditionally underserved communities.
Like all federal programs, the Treasury’s Emergency Capital Investment Program must suffer a number of checks and balances, that at times are contradictory to one another. This is not poor design, but rather the reality of government programs. And ultimately, these checks and balances are what preserves the integrity of the of federal programs aimed at wealth disparity, and in this manner preserve the likelihood of expansion. The ECIP is off to a good start and the evolution of the program will likely make an important contribution to the populations that have found access to capital elusive.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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David Evanson
David R. Evanson has more than 30 years working in the media, on Wall Street and in media relations. He has worked with investment banks, asset managers, private equity investors and institutional brokers on a variety of marketing and communications challenges. David is also a recognized financial writer, having authored five books on finance and economics, and articles in Barron’s, Forbes, Investment Dealers’ Digest, On Wall Street, Financial Planning and Entrepreneur, among others. David brings to the table a well-developed understanding of the capital markets, investments and corporate finance, and a talent for creating targeted media communications programs for financial services providers.
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