How ‘Progressive’ Policy Weakens African-American Banks

The Washington Post and other outlets have highlighted the decline of banks owned by African-Americans, however coverage hasn’t connected that trend with post-recession Dodd-Frank regulations that accelerate the decline of community banks. The balance sheets of black-owned banks, along with minority-owned banks generally (which the government calls Minority Depository Institutions (MDIs)), are similar to general community banks, according to the Federal Deposit Insurance Corporation (FDIC) relying on core deposits to fund loans heavily weighted in residential and commercial real estate.

A recent Harvard study found that while the number of community banks was already declining before the financial crisis, since the second quarter of 2010 – Dodd-Frank’s passage – community banks have lost market share at a rate double what they did between Q2 2006 and Q2 2010.

However, the FDIC reports that that MDIs have been harder hit than the broader banking sector; between 2001 and 2013, the failure rate for MDIs was about three times higher than it was for the industry as a whole. Even though some MDIs (particularly Asian/Pacific Islander-owned banks) have experienced recent growth in the number of charters and overall assets, this is not the case for black-owned banks. The FDIC reported there were just 25 black-owned American banks in 2014, a sharp plummet from 48 in 2001.

“Your mission is important,” FDIC Chairman Martin Gruenberg told the crowd at a conference on MDIs. “You provide responsible banking services to those who might not otherwise have access to a bank. And, you serve some of the most challenging markets in the country.”

Analysts point out that the subprime mortgage crisis disproportionately hit minority communities, especially black-owned banks, contributing to their demise. Another factor negatively impacting these banks, observers say, is they have lagged behind other banks in adopting new technologies to offer customers.

Black banks and other MDIs tend to underperform other financial institutions by standard measures of profitability, the FDIC reports, because they’re required to set aside large provisions for loan losses. MDIs also have higher expense ratios, which are particularly high for the smallest MDI charters (those with assets less than $100 million), many of which serve African-American, Native-American, and multi-racial populations.

Under the Dodd-Frank regulatory regime, community banks are disproportionately hit by additional compliance and legal costs, adding to expense ratios. They do not have the economies of scale that larger institutions have to absorb and disperse costs.

The FDIC has identified wide disparities between blacks and whites accessing the banking system. In 2013, 20.5 percent of black households were “unbanked” compared to 3.6 percent of whites, which means African-Americans are much less likely to hold an account at a federally insured depository institution enabling them to deposit funds securely, conduct basic financial transactions, accumulate savings, and access credit. And 49.3 percent of recently-unbanked households were black, compared with 29 percent of whites; many recently-unbanked people reported they left because of high or unpredictable account fees.

Accelerated fees are passed on to consumers as expenses increase due partly to new regulations such as Dodd-Frank. As fewer black-owned banks survive regulatory burdens and other economic headwinds, it is likely their dwindling numbers contribute to the decline of African-Americans benefiting from financial services. This has negative implications for the financial stability and wealth accumulation for these families.

Democrats (along with bureaucrats at the Consumer Financial Protection Bureau) have tried to go after car dealers and other lenders for “disparate impact” against minorities. Perhaps they should have turned that lens on themselves prior to passing Dodd-Frank. However well-intentioned Democratic lawmakers were in creating Dodd-Frank, its impact is another example of the negative consequences of over-regulation. That’s quite the opposite of “progressive.”