Over the course of the last 20 years, the ranks of banks and credit unions in the United States have declined by about half, to about 5,500 each, while deposits have increasingly been concentrated in the handful of largest institutions. The losses have been especially acute among African-American banks and credit unions. Yes, blatant redlining and racial discrimination have eased — which, ironically, may have made survival more difficult for African-American institutions, which now face competition whereas they formerly enjoyed a kind of monopoly in communities shunned by mainstream, white-owned banks. (Consider the comparable dilemma of some Historically Black Colleges and Universities.)
If you believe that the diminution of black-owned financial institutions is simply business as usual in a free-market economy, and that the needs of African-American communities are, or inevitably will be, equitably met, then this trend is probably not alarming. But if you believe that these minority institutions represent something more than the numbers — that black ownership matters socially, psychologically, and yes, economically — you have to be concerned about their fate. If you believe that they should and could be sustained, then consider the case argued in Oscar Abello’s recent article in Next City, “Why Black Banks Need Policy Support, Not Just Deposits.”
When people consider what they can do to support these minority institutions — or for that matter, other community credit unions or banks that offer alternatives to the megabanks — they quite naturally think about moving their deposits. But as Abello quotes Doyle Mitchell, president and CEO of D.C.’s African American-owned Industrial Bank, “’It always comes back to raising capital.’” A bank or credit union must meet regulatory standards for minimum ratios of capital (net worth) to assets. Capital is what enables an institution to bring in additional deposits, to a multiple of about ten dollars for each additional dollar of capital. While masses of people can choose to move their deposits (I know, that’s not as easy as it sounds), few are able or inclined to buy equity shares or make an outright donation that goes into the capital accounts of a financial institution. (Crowdfunding could be a possible strategy, but the amounts required to make a difference could run into the millions.)
Consider, too, the bizarre phenomenon that followed the Occupy Wall Street movement. Outraged by the public bailout of megabanks, “Move Your Money” campaigns quickly went viral. It was estimated that up to a million accounts were moved into credit unions and community banks. But because of the required regulatory capital ratios, some credit unions found themselves with a nearly unprecedented problem. When deposits flooded in, their capital ratios declined, putting them in regulatory danger. Consequently, some of these community-owned, democratically governed institutions literally turned money away, or even encouraged existing depositors to take their money out. So, yes, bank where your principles are, and move your deposits — it may help, but it is insufficient to foster a vibrant minority banking marketplace.
When it comes to policy, there are federal precedents for supporting black and other minority banks, but these have more or less been honored in the breach. In 1989, amid the scandal-ridden Savings and Loan crisis, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Its Section 308 instructs regulators to “preserve the number of minority depository institutions; preserve the minority character in cases of merger or acquisition … [and] promote and encourage creation of new minority depository institutions.” But the reality is grim: the number of black-owned banks and credit unions has relentlessly declined, a trend accelerated by the Great Recession. And few new institutions have been chartered.
As I argue in my book (Democratizing Finance: Origins of the Community Development Financial Institutions Movement), the CDFI Fund was—and is—the most promising vehicle for providing capital to preserve and promote the growth of black-owned banks and credit unions. But the CDFI Fund is not a regulator, and it is not bound by Section 308. Its policies and programs have not prioritized investment in these institutions. In fact, as I pointed out, over 1996-2016 less than 20 percent of the fund’s direct capital investment went to all types of credit unions and banks combined — and even less went to African-American institutions. Nor have these mostly small minority institutions been able to utilize effectively the complex, high-impact New Markets Tax Credit program administered by the CDFI Fund. And it is unclear whether they can play any effective, profitable role in the new Opportunity Zone initiative.
Given the inherent disadvantages of small size in the financial marketplace, the steady consolidation of the banking and credit union industries, and the thinning ranks of African-American financial institutions, it’s not easy to be optimistic about the future of these institutions. But the issue is gaining increased visibility; there are federal policy precedents; and the CDFI Fund remains a viable platform for new capital initiatives. Creative solutions are possible — with sufficient grassroots energy and political will.
Clifford Rosenthal is the author of “Democratizing Finance: Origins of the Community Development Financial Institutions Movement.” He is a nationally and internationally recognized innovator, advocate, and developer of programs to provide financial access for low-income and underserved people. He has worked and volunteered for more than 40 years in the cooperative movement, initially in organizing food co-ops for Native American and migrant farmworker organizations, and for more than 30 years in the credit union movement. From 1980 through 2012, Rosenthal managed the National Federation of Community Development Credit Unions, the association of more than 200 credit unions serving low-income and minority communities (now known as Inclusiv). In 2012, he was recruited to establish the Office of Financial Empowerment at the newly created federal Consumer Financial Protection Bureau.