By Kelly Pike
Achieving the American dream requires capital. And to grow capital, you need capital. It’s a basic tenet of our economy.
But for generations of Black Americans, equitable access to the banking system is a promise that has never been fulfilled. From Jim Crow laws to the New Deal, Black Americans have faced systemic financial discrimination and exclusion, casting a long shadow of economic disparity that continues today.
The racial gap in wealth is stark. The average white family in the U.S. has a net worth of $171,000—almost 10 times more than the average Black family, according to the Brookings Institute. African Americans are more likely to live in poorer neighborhoods with underperforming schools, poor infrastructure and limited access to quality healthcare—something COVID-19 has brought to the forefront once again.
“You have to peel back the onion to see why [we got] to where we are. When you do that, you will find this history of discriminatory practices and redlining neighborhoods is directly related to economics” says Kenneth Kelly, chairman and CEO of $291 million-asset First Independence Bank in Detroit and immediate past chairman of the National Bankers Association, which represents minority-owned banks. “While those things may not appear to matter 60 to 70 years later, they fundamentally do. They set the stage for the transfer of assets from one generation to another and the quality of education for those neighborhoods.”
They also demonstrate the need for minority depository institutions (MDIs) and community development financial institutions (CDFIs), including Black-owned banks. For generations, these institutions have provided credit, capital and financial services to low- and moderate-income people and minority communities that have historically been underserved or outright ignored by the financial services industry.
“When I think about the studies from the Chicago Federal Reserve, Boston Federal Reserve and the FDIC, they all demonstrate that these MDIs have a positive impact on communities they serve,” Kelly says. “When 70% of African Americans don’t have a bank branch in their neighborhood, it suggests to me that they are much further away from the American Dream.”
That dream is growing harder to reach as the number of MDIs declines. Nearly a third of minority banks closed or merged between 2008 and 2018. That number is even higher for Black-owned banks. There are just 21 of them—half as many as in 2008. Experts attribute much of the decline to the 2008 financial crisis, which was especially damaging to minority communities and the banks that serve them. Compared with white-owned banks, minority banks had a higher ratio of nonperforming loans, lower core deposits and higher expenses.
The greatest challenge of all, though, is capital. Black banks tend to have fewer assets and are much less likely to be publicly traded, so they don’t have access to the public markets. Plus, economic downturns disproportionately affect people of color, leading to earnings challenges that put off investors and their new capital, according to James Sills, vice chairman of ICBA’s Minority Bank Advisory Council and president and CEO of $305 million-asset M&F Bank in Durham, N.C., the second oldest African American-owned bank.
“A lack of capital really restricts you in how you can serve that community,” he says.
With social and economic justice movements making front-page news, Black-owned banks are getting more attention—and capital. The National Black Bank Foundation and its philanthropic partners recently announced the creation of the $250 million Black Bank Fund to inject capital into Black banks and inform the public about their importance. Bank of America made $50 million in direct equity investments in minority depository institutions (MDIs), including Detroit’s First Independence Bank and M&F Bank in Durham, N.C.
James Sills, vice chairman of ICBA’s Minority Bank Advisory Council and president and CEO of M&F Bank, says his community bank plans to invest the capital in technology initiatives related to digital banking, SBA lending and marketing.
Banks are also talking about providing technical assistance, loan participations, ATM access and joint venture programs—moves that will benefit everyone.
“Minority banks and community development financial institutions [CDFIs] must be central pillars to any economic recovery action plan for minority and low-income communities, which they serve at far higher rates than any other financial institutions and do so in compliance with strict consumer protection laws and regulatory oversight,” says Rep. Gregory Meeks (D-N.Y.), chairman of the Foreign Affairs Committee and member of the Financial Services Committee.
“These institutions create significant positive economic and social externalities but are often smaller and operate in more challenging markets than big banks. As such, MDIs and CDFIs deserve far greater support and funding from the government, big banks and capital markets, all of which benefit tremendously from the work these institutions do in marginalized communities.”
Black banks formed for the same reasons all banks are founded: a need for credit in their community. State and local Jim Crow laws and a culture of racism severely limited economic opportunities for African Americans in the South while allowing financial service providers to deny them service. These financial limitations followed African Americans during the Great Migration, a period between 1916 and 1970, when many chose to move to the industrial north in search of opportunity and freedom.
The first attempt to organize a bank for Black people in the U.S. came in 1865, when Congress chartered the Freedman’s Savings Bank for newly freed ex-slaves. The bank, which was mostly run by white men, attracted millions in deposits and opened branches across the country, but it didn’t last. A volatile economy and poor oversight that allowed a board member to misdirect funds to his family business caused depositors to lose nearly $3 million, and their faith in banks, when it failed in 1874.
In 1888, the first Black-run bank in the U.S. was founded, followed quickly by two other banks. By 1906, there were 33 Black banks, a figure that continued to grow until the Great Depression decimated the banking industry as a whole. Among the survivors was Sill’s M&F Bank, founded as Merchants and Farmers Bank in 1907 to serve a prosperous Black business district in Durham.
The first Black banks weren’t focused on profitability so much as serving the community, according to Timothy Todd, executive writer and historian at the Federal Reserve Bank of Kansas City and author of the book Let Us Put Our Money Together: The Founding of America’s First Black Banks. They encouraged deposits, created special programs to help those who lost their jobs, and extended home mortgage loans to create lower interest rates in a way that wasn’t common for the time.
In Birmingham, Ala., the Alabama Penny Savings Bank operated beyond traditional hours to serve a workforce that couldn’t leave work to come into the bank, Todd says, noting that this was not the industry norm at the time.
“[Black banks] were innovative, resilient and really cared about the community,” he adds.
While this first generation of African American banks were not long-lived by modern standards, they were successful for their time, Todd says. The late 19th and early 20th centuries were essentially one long banking crisis. Small banks stayed open just five to seven years, on average, and depositors often lost money when a bank suddenly shuttered. Federal deposit insurance wasn’t introduced until 1933.
The first three Black banks lasted around 20 years, he adds.
“When I think about the history, I think about the perseverance of a sector of people who have had to really make a way out of no way,” Kelly says. “It represents the struggle for inclusion, the ability to buy a house, the ability to save and assist your kids with going to college. That’s what these institutions represent.”
There were also those who didn’t want to see African Americans succeed. In 1921, the Greenwood district of Tulsa, Okla., was known as Black Wall Street. This affluent community of African Americans was filled with hundreds of thriving businesses and nice houses. Some white people resented its success, historians say. When a Black man was accused of assaulting a white woman in an elevator, it exacerbated existing tensions and led to a race riot that burned much of Greenwood to the ground, writes Mehrsa Baradaran in The Color of Money: Black Banks and the Racial Wealth Gap. White mobs destroyed or looted thousands of homes, and as many as 300 people died.
Racism wasn’t limited to angry mobs, however. It was also entrenched in the federal government. When the Federal Housing Administration (FHA) was created as part of Franklin Delano Roosevelt’s New Deal and the National Housing Act of 1934, its goal was to make home ownership more affordable by insuring mortgages, but not for everyone. People of color were intentionally left out.
As with the Homeowners Loan Act in 1933, which created the Home Owners Loan Corporation (HOLC) to provide mortgage relief for homeowners, the FHA developed underwriting standards to help lenders, appraisers and other real estate professionals identify high-risk areas the FHA wouldn’t insure. Invariably, low-risk neighborhoods were white communities, while high-risk neighborhoods, outlined in red ink on maps, were minority communities. This gave us the term “redlining” to describe the practice of refusing to lend to low-income and minority communities.
The FHA also expressed preference for new housing in the suburbs over older housing stock in urban areas, warning that such properties “have a tendency to accelerate the rate of transition to lower class occupancy.” It also encouraged school segregation and physical barriers like highways to protect neighborhoods from “adverse influences,” Richard Rothstein notes in The Color of Law: A Forgotten History of How Our Government Segregated America.
This redlining systematically cut Black Americans out of the single most important way white American families have to build generational wealth: homeownership. Cheap, FHA-insured mortgages allowed white families to buy homes in suburban areas that increased in value over time. These families would realize the financial gains when they sold the home to another white family who also had access to cheap mortgages. White families could also take cash out to start a business, improve their home or send children to college. They’d pass this wealth on to their children, and the cycle would repeat.
FHA-insured mortgages were unavailable in urban areas, on the other hand. This introduced an era of “white flight” while making it nearly impossible for African Americans to move out. Not only did this push down prices in Black neighborhoods; it also meant that Black families didn’t have access to credit to repair aging homes or start businesses.
Even wealthy Blacks struggled to leave urban neighborhoods. Real estate agents often steered Black families away from white neighborhoods, while deed restrictions, neighborhood covenants and exclusionary zoning in some areas explicitly prohibited nonwhite owners or occupants. Meanwhile, lower home values and less wealth meant cities had less money to invest in schools, infrastructure and other programs, reinforcing a cycle of poverty that continues today.
Minority banks need legislative, regulatory and financial support to stay operational and profitable, and ICBA is working closely with Congress, agencies and federal programs to improve responsiveness to these needs.
Using the insights of its Minority Bank Advisory Council, ICBA is focusing its advocacy on finding solutions to strengthen minority banks and finding partners dedicated to this goal. These include changes that spur the creation of de novo minority depository institutions (MDIs); streamline the community development financial institution (CDFI) application and recertification process; provide financial and technical assistance to MDIs and CDFIs; and position these institutions to aid in COVID-19 relief.
For example, ICBA supported the provisions in the year-end stimulus bill that aimed to strengthen MDIs and CDFIs. These included:
To learn how you can advocate for ICBA-supported bills related to MDIs and CDFIs, visit icba.org/advocacy
When the civil rights movement swept the U.S. in the 1950s and 1960s, it helped raise awareness of economic disparity and financial discrimination. The Fair Housing Act of 1968 made it illegal to discriminate on the basis of race or color when selling or renting a home or financing a home purchase. This was landmark legislation, but it wasn’t enough to overcome the FHA’s legacy of redlining.
Accounting for differences in income and education, an owner-occupied home in a Black neighborhood today is worth $48,000 less than a similar home in a white neighborhood, according to a 2018 study by the Brookings Institution and Gallup.
The civil rights movement also reignited interest in African American-owned banks, resulting in the chartering of many new Black banks in the late 1960s and 1970s. That includes First Independence Bank, which was founded after the 1967 riots in Detroit.
“When you look at the history of these banks, typically they rise up through some sort of crisis or turmoil,” Kelly says. “You see banks getting their start because of the desire of individuals to take their economic destinies in their own hands.”
More legislation was passed, including the Community Reinvestment Act (CRA) of 1977, which requires banks to help meet the credit needs of all the communities it does business in, including low- and moderate-income neighborhoods. In 1989, Congress recognized the important role of minority banks when it passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Section 308 of FIRREA defined MDIs and set goals for the FDIC to aid in the promotion and preservation of these MDIs. The Federal Reserve created its Partnership for Progress program in 2008, while the Dodd-Frank Act of 2010 expanded FIRREA to apply to the Office of the Comptroller of the Currency (OCC).
Black community bankers say strengthening their institutions is critical to closing the country’s racial wealth gap. Kenneth Kelly, immediate past chairman of the National Bankers Association and chairman and CEO of First Independence Bank, an African American-owned community bank in Detroit, is asking corporate America to find ways to help minority depository institutions (MDIs) have a positive impact on underserved and underbanked communities.
Kelly offers three suggestions for accomplishing this goal:
Despite these legislative landmarks, lending discrimination continues. Studies of Paycheck Protection Program (PPP) lending suggest that minority-owned businesses had a harder time securing PPP loans than white borrowers. A New York Times analysis found 75% of loans in the first round went to businesses in majority white census tracts, even though just 68% of the population lives in these areas.
“Minority banks … really stepped up to meet the needs of customers, despite the challenges of the pandemic.”
—James Sills, M&F Bank
While some banks were helping the large franchises and publicly traded companies secure PPP loans that they’ve since given back, community banks like M&F Bank say they were serving the small businesses in their communities that were in need of assistance. In M&F Bank’s case, 75% of the PPP loans it funded went to minority businesses in 16 different markets in North Carolina, Sills says.
“Minority banks and other community banks in this country really stepped up to meet the needs of customers, despite the challenges of the pandemic,” he says. “Having a relationship with an MDI allowed that capital to flow back into communities effectively and efficiently.”
It’s a role that Sills hopes banks like his will continue to fill for years to come despite challenges. When he began working in the industry 30 years ago, there were 55 African American-owned banks, he says, but only about one in three of those remain today. Sills says this is due to regulatory burdens, lack of access to capital, changing urban demographics and difficulty in attracting talent.
This makes the work of these community banks and other MDIs all the more critical. “All banks are charged with serving the community,” Sills says, “but minority banks play a really special role by providing access to capital to buy homes, commercial real estate or start businesses. MDIs should be considered critical financial infrastructure in the U.S.”