Amber Burton et al. Wall Street Journal, November 7, 2020
A half-century ago, the federal government set out to attack the racial wealth gap by supporting Black-owned banks. Policy makers hoped the banks would lend to Black communities sidelined by the mainstream financial system.
But five decades of federal financial and regulatory support have failed to boost America’s Black-owned banks. The majority have disappeared under the burden of soured loans, bigger competitors created by mergers and financial downturns that hit small lenders hard. Fifteen years ago America had 36 Black-owned banks, government data show. Now there are 18.
And Black people still face obstacles to getting loans. Would-be borrowers in Black neighborhoods over the past decade have been less likely to have their home loans approved than borrowers in other neighborhoods, according to a Wall Street Journal analysis of federal data in the nine largest cities by raw Black population.
Those who do get home loans are likely to pay more than other borrowers on comparable loans. A FDIC survey found last year that 13.8% of Black households in America don’t have bank accounts at all, compared with 5.4% of the overall population. The survey also found that 72.5% of all U.S. households used bank credit last year, but just 52.5% of Black households.
Now a new generation of entrepreneurs, companies and regulators is trying a different strategy. They are promising to strengthen Black-owned banks by building up their capital with private investments and giving them new ways to earn money with hundreds of millions in big corporate deposits. Their hope is that this approach will ultimately improve Black communities’ access to capital.
Federal authorities define Black-owned banks as lending institutions regulated by the U.S. government that have more than 51% of the voting stock in the hands of Black owners. Such lenders flourished during the early part of the 20th century as a key source of capital for Black borrowers. The Nixon administration offered support in 1969, leading to direct government deposits from the U.S. Treasury. The approach was part of what Mr. Nixon called in an executive order an attempt to “obtain social and economic justice” for minorities. In 1989 Congress ordered regulators to provide additional forms of technical support to Black-owned banks and other minority-run financial institutions.
Black-owned banks have succeeded in making capital more widely available in the sense that they approve a higher percentage of Black applicants’ loans than other banks. But their impact on the communities they serve is increasingly limited by their small size and often precarious financial standing.
The reasons are both specific and systemic. Black-owned banks often believe they can do a better job assessing the risk of Black borrowers, but they tend to make riskier loans due to their deliberate lending to consumers shut out by mainstream banks. They also share many of the same problems afflicting small community banks: a limited number of branches, little money to invest in the type of mobile-banking technology that might attract new customers and an industry consolidation that increasingly puts more market share in the hands of megabanks like JPMorgan Chase & Co. and Bank of America Corp. The total number of banks insured or supervised by the Federal Deposit Insurance Corporation has declined by 45% since 2001, compared with a drop of 56% for the number of Black-owned banks over the same period.
Some big companies are trying to change the lopsided odds for Black-owned banks by becoming customers of the banks themselves. Their interest intensified after the May killing of George Floyd while in police custody. Both Netflix Inc. NFLX 0.59% and PayPal Holdings Inc. PYPL 3.32% said they would provide deposits to existing Black-owned banks, giving them a bigger financial cushion and more money to lend.
Due in part to this new push, assets at Black-owned banks rose about 10% in the second quarter of 2020 from the first. It was the biggest quarter-to-quarter change in two decades.
Corporate deposits are a stable, low-cost source of funding for banks. The more of these prized customers banks have, the greater capacity they have to lend. Netflix has committed $100 million to the effort, including $25 million to a community development nonprofit that will help deploy the funds via loans and deposits in Black-owned banks.
PayPal recently deposited $50 million in Black-owned Optus Bank in Columbia, S.C. as part of a $350 million push to support Black businesses, and Bank of America also bought a stake in the same lender. Optus Bank almost doubled its assets in the past year alone, to $155 million as of the end of June.
Assets aren’t the only measure on the rise at Optus. Total net income was $2.8 million in the third quarter, up from $366,000 in the same year-ago period.
Dominik Mjartan, Optus’s president, said the PayPal deposit allowed it to fund $40.5 million in loans through the Paycheck Protection Program, the federal government’s coronavirus lifeline for small businesses. Some of the businesses—including an auto-repair shop that had to shut down earlier in the pandemic—would have closed for good without the funding, he said.
“You cannot solve 400 years of disparity with a deposit,” he said. “But it can create movement.”
There are other initiatives under way to support more of these Black-owned institutions. One is from Ashley Bell, an Atlanta lawyer and former regional administrator for the Small Business Administration during the Trump administration. He is putting together a nonprofit that intends to raise $250 million to buy stocks in Black-owned banks, via an entity called the Black Bank Fund. The initiative is being led by Dentons, the law firm where Mr. Bell works, and consulting firm KPMG, and aims to buy nonvoting shares in Black banks.
The idea, Mr. Bell said, is to leave decision making power in the hands of the banks’ Black owners while providing extra capital so the banks can significantly increase the amount of money they can loan. Mr. Bell said he is hoping the effort will help Black-owned banks increase their income as well as their services. Most such banks, for example, currently don’t have wealth-management arms. “How can you create intergenerational wealth if you don’t even offer that service in your community?” he said.
A new financial-services company in Atlanta is trying to bring new customers to Black banks partly through the prominence of its co-founders: former Atlanta Mayor Andrew Young and hip-hop artist and activist Michael Render, known as Killer Mike. Their company, Greenwood, will issue debit cards and offer online deposit services via accounts at other banks.
The recent history of Black banks can leave a person with a “sad and hopeless feeling,” said Mr. Render, who started a #BankBlack campaign in 2016. Many Black people, he said, have felt marginalized by the mainstream financial system. “We’ve never been allowed to fully participate,” he said. He argues there is widespread demand in the Black community for better financial services. “Black people have understood capitalism, at their core, since they were the capital,” he said.
The idea of lending specifically to Black Americans began with Reverend William Washington Browne, an ex-slave who started a fraternal organization to support Black enterprises and founded America’s first Black-owned bank in Richmond, Va in 1888. By 1900, the Savings Bank of the Grand Fountain United Order of True Reformers had branches in 24 states. Regulators closed the bank 10 years later.
An entrepreneurial spirit born out of exclusion reverberated into the 1960s, Ms. Baradaran said. The Civil Rights era produced another boom of interest in Black banks, from activists and the government. Though Congress in 1968 had just outlawed “redlining,” officials remained concerned that discrimination would continue. If mainstream banks wouldn’t lend to minorities, the thinking went, then perhaps minority-owned lenders would help bring financial equality.
In 1969, the Treasury Department began depositing money in Black-owned banks to boost their capital so they could lend to communities that mainstream banks continued to shun. The Minority Bank Depository Program still encourages government agencies to deposit funds in minority and women-owned banks. As of 2020 there were 71 minority banks enrolled in the program and the total amount of deposits collected by the banks in fiscal year 2020 was $32.6 million.
In 1989, Congress passed more legislation that tasked the FDIC with providing technical support and advice to minority-owned depository institutions so they could continue to support underserved communities.
The Nixon-era policy of supporting Black-owned banks as a way of addressing lending inequities had a flaw, said Anne Price, the president of advocacy group Insight Center for Community Economic Development. Several dozen little banks couldn’t possibly cancel out entrenched discrimination by the country’s biggest lenders. Relying on Black-owned banks to solve the problem inadvertently absolved everyone else, she said.
“In a way, there were two markets set up: one for Blacks and another for whites,” she said.
Black-owned banks now account for just 0.2% of all banks regulated by the FDIC, according to June 30 data. The last Black-owned bank to go under was City National Bank of New Jersey, which regulators seized in November 2019. Total assets at America’s Black-owned banks were $4.5 billion as of June 30, according to the FDIC, down from $4.7 billion in 2005.