UVA Darden School of Business Delivers Report to U.S. Treasury Department’s Community Development Financial Institutions Fund

The U.S. Treasury Department’s Community Development Financial Institutions Fund(CDFI Fund) this week issued the report Introduction to Risk and Efficiency Among CDFIs: A Statistical Evaluation Using Multiple Methods, conducted by Gregory Fairchild, E. Thayer Bigelow Associate Professor of Business Administration of the University of Virginia Darden School of Business, and Ruo Jia of Stanford Graduate School of Business.

The independent report, one of two, provides the first-ever comparative analysis and evaluation of the effectiveness of Community Development Financial Institutions (CDFIs) as compared to mainstream lenders. The findings confirm that CDFIs are resilient and a reliable resource for capital in areas that need it the most.

“The reports released demonstrate that CDFIs that receive financial assistance from the CDFI Fund are meeting their missions to promote economic growth by providing access to credit, capital and financial services to underserved populations and distressed communities,” said Annie Donovan, director of the CDFI Fund. “These reports demonstrate that CDFIs are a vibrant and essential part of the financial services industry and that institutions can successfully and responsibly lend to low-income people and in low-income communities.”

These reports found that CDFIs have no more risk than conventional lenders and that they perform nearly just as well as mainstream financial institutions. Darden’s report is an analysis of CDFI banks and credit unions to assess their risk of failure and their operational efficiency relative to mainstream financial institutions.

“Two of the primary beliefs about community development, certainly from laymen, are that the work is more risky and less efficient, and that funds spent on these efforts are valuable resources pursuing poor opportunities,” said Fairchild. “Our research suggests that the reality is that CDFIs have learned to operate in these markets. Their levels of failure risk or inefficiencies are commensurate with their size and areas of operation.”
Key highlights from the Darden School report include:

• CDFI banks and credit unions were found to have no more risk of financial failure than mainstream financial institutions, even after controlling for the CDFIs’ degree of involvement in the mortgage market during the financial crisis.
• Despite serving predominately low-income markets, CDFI banks and credit unions had virtually the same level of performance as mainstream financial institutions.