There are forty percent fewer banks today than there were just fifteen years ago, and today there are just 23 Black-owned banks, with a total of roughly $5 billion of deposits—a fraction of the deposits in any one of the largest commercial banks.
The implication of this is that efforts to induce large banks to do more lending in minority communities—while well-intended—may not be all that effective at spurring new businesses and economic growth in these places: These banks simply don’t have the ability to discern what businesses are likely to grow and prosper.
Forbes
Oct 25, 2021
Black-Owned Banks Are Key To Lifting Economic Fortunes Of Black Communities
By Ike Brannon
One of the issues that hinders the economic prospects of Black communities is a lack of access to capital so that firms can invest and grow.
A basic problem many Black communities face is that lending can require an in-depth knowledge of those communities, something traditional banks often lack. More than that, it requires a tolerance for greater risk and long-term investing for banks to realize a profit in a Black community, where incomes tend to be below the national average and the opportunities for profitable investment may be fewer and not as obvious.
Large commercial banks do operate in most Black communities, taking deposits and making some loans. But they have little knowledge of these communities and tend to make only the safest loans. And by gobbling up all the deposits, they end up crowding out the smaller banks that know their depositors.
I was born and raised in a small, rural community, where the president of our hometown bank—a longtime friend—tells me that a similar thing happens there: While they compete against commercial banks for deposits these days, they do not compete against them to do loans. His bank’s constraint is access to capital—not profitable places in the community to invest.
The same thing is true in many black communities as well, except the lack of capital is exacerbated by a lack of Black-owned banks. There are forty percent fewer banks today than there were just fifteen years ago, and today there are just 23 Black-owned banks, with a total of roughly $5 billion of deposits—a fraction of the deposits in any one of the largest commercial banks.
The implication of this is that efforts to induce large banks to do more lending in minority communities—while well-intended—may not be all that effective at spurring new businesses and economic growth in these places: These banks simply don’t have the ability to discern what businesses are likely to grow and prosper.
Robert F. Smith, a Black billionaire financier, has suggested an idea – one he is calling The 2% Solution – that involves putting more capital directly into the hands of Black-owned banks. Rather than solely relying on the Community Reinvestment Act to mandate commercial banks to lend in minority communities, he suggests that we take steps to induce commercial banks to put capital equal to two percent of their annual net income, or about $2 billion a year, directly into Black-owned banks so that they can make loans.
Because they are in Black communities and operate as community banks, Black-owned banks tend to be better at discerning profitable lending opportunities. More capital would allow them to lend to business ventures that may need more time to come to fruition, expanding the range of profitable lending opportunities for them.
Since there aren’t enough Black-owned banks to effectively reach all Black communities in the U.S., we might need to also direct some of these funds to non-minority banks that effectively serve Black communities where they are based.
Boosting the economies of Black communities by helping Black-owned banks to lend more money is not a new idea: In the early 2000s, a brilliant economist then with the FDIC named Chris Richardson suggested that we create a voucher system to replace the Community Reinvestment Act that would have essentially allowed commercial banks to pay Black-owned banks and other community banks to make loans in minority communities instead of meeting lending quotas imposed upon them.
His idea closely aligns with Robert F. Smith’s proposal. And each is based on the same notion, which is that the economies in these communities will do better if it’s their own banks making the financing decisions.
Alan Erenhalt’s epochal book A Lost City examines the economic decline of a formerly thriving African American community called Bronzeville. The point Erenhalt makes is that in its 1950s heyday, the neighborhood had a thriving economy, in no small part due to the fact that nearly all of the businesses in the neighborhood were Black-owned and operated in a relatively self-contained economy. Its residents went to a Black-owned grocer, a Black-owned mortuary, and a Black-owned five-and-dime store, and—most importantly—everyone put their savings into the local Black-owned bank.
When urban renewal cleared the slums and destroyed much of its housing stock, the government also took steps to ostensibly help its local economy by bringing in larger, newer chain stores, supermarkets, and banks. While it did give consumers lower prices, these effectively pushed out the Black-owned businesses, which was problematic because not all of the businesses that replaced them were keen on hiring Black workers for management jobs or other key positions of responsibility.
As a result, the men who ran the local butcher or other local businesses went elsewhere to find work and the community gradually lost its middle-class base. And after a while, the local banks saw few people worth lending to in the community and were ultimately absorbed by larger white-owned banks.
The point is that black-owned banks once worked in America. While it is more difficult today for smaller banks to remain viable, we have a financial system that intentionally makes it possible for smaller banks to function and thrive in the right conditions.
An infusion of capital, directed by Black-owned banks, represents a promising way to boost these economies.
Ike Brannon is a former senior economist for the United States Treasury and U.S. Congress.