Minority Owned Banks and Banking Access in Minority Communities

TRACEY MORANT ADAMS: Good morning. Thank you for joining the Economic Mobility Project at the Federal Reserve Bank of Chicago as we discussed minority owned banks and banking access in minority communities. I am Dr. Tracey Morant Adams, Senior Executive Vice President and Chief Community Development and Corporate Social Responsibility Officer at Renasant Bank. Renasant Bank started as the People's Bank in 1904, a small community in Mississippi. Since then, we have grown to become one of the Southeast's strongest financial institutions and a proud banking institution for a myriad of small, minority owned businesses in the Southeast.

We believe that small and minority owned businesses are the backbone of our economy. They drive innovation, create jobs, and foster diversity and resilience within our business landscape. By empowering them, we not only promote economic growth, but also, build a more inclusive and equitable society. That is why banks must play a pivotal role in leveling the economic playing field and providing financial resources, expertise, and opportunities to propel small, minority owned businesses toward success. Today, you will hear two impactful presentations from Chicago Fed economists.

In the first presentation, Maude Toussaint-Comeau, Senior Economist and Economic Advisor, will discuss the role of minority depository institutions that provide financial services and promote community development in traditionally underserved communities. In the second presentation, economist Jung Sakong will investigate the reasons why low income and Black households are less likely to visit bank branches than high income and white households. After Maude and Jung share their research, there will be a roundtable discussion featuring a panel of experts. I'm so happy, again, that you have joined us this morning, and now to Dr. Kristen Broady to introduce our first guest.

KRISTEN BROADY: Thank you so much, Dr. Adams. We so appreciate you for providing those opening remarks, and now, I'd like to introduce Dr. Maude Toussaint-Comeau, Senior Economist here at the Chicago Fed, who will share her research on the state of Minority Depository Institutions. Maude, I'll turn it over to you.

MAUDE TOUSSAINT-COMEAU: Good morning, everyone. Thank you, Kristen, for this great introduction. I'm very pleased to be your speaker in today's event on Minority Depository Institution, and I'll be referring to them as MDIs at time.

I'm very pleased to be part of this important conversation organized by the Economic Mobility Project of the Federal Reserve Bank of Chicago. Before I begin, the usual disclaimer is to apply that the views that I am about to express are my own and not those of the Federal Reserve Bank of Chicago or the Board of Governors of the Federal Reserve System. So if we move to the next slide, in today's talk, we'll provide a brief background on Minority Depository Institutions, or MDI, because the legacy matter to understand their role and why we are having such a conversation today.

I will present some data on the trends in their numbers and the number of their branches, which might sound some alarms regarding the sector's role to continue to expand services to underserved places. Finally, I would conclude with data on performance, which have strengthened following the financial crisis and highlight some efforts that are being done to promote MDIs, as well as some initiatives, including capital injection programs, that are allowing them to broaden their intermediation efforts. So the next slide, a little bit on the background of Black banks.

As you know, the first Black owned banks in the United States was founded in 1888. I have noted here some dates, which are obtained from the timeline of minority banks provided by the Federal Reserve Board Partnership for Progress website. What we may see here, if we look at that chronology, is that the movement and volatility of Black banks has coincided with broader economic forces. So as we can see, there's been high closures during banking crises, such as the savings and loan crisis in the 1980s, and we have seen increases over the years, the decades in the number of Black banks during economic expansion, like through late 1990s and early 2000s.

But at other periods, we have seen increases in the number of Black banks that reflected a movement for economic empowerment, like in the 1970s, out of a sense that capital needs to also be controlled by the groups that being shut out of the system. As for other minority banks, in the next slide, the legacy of Asian banks is also rooted in the exclusion of these groups of individuals out of the financial system. And throughout the 1950s and 1960s, it is reported that places, like Chinatown in Los Angeles, for example, was not able to get loans, although, businesses were thriving.

So the first federally chartered Asian banks was founded in 1974. So Asian banks are the largest groups of minority owned banks in the US. By the 1980s and 1990s, globalization has brought in banks from Taiwan, Hong Kong, and China. Some of those Asian banks are internationally focused and are predicated on trade relationships with Asian countries. The first Hispanic banks in the US also were established in the 1960s and were created to provide services to low income Hispanic American communities. Native American owned banks are the smallest categories of minority institutions, although, now close in numbers with Black banks. These institutions, the Native American owned banks provide critical lifeline to Native American communities in or near reservations in rural areas that are, in many instances, banking deserts.

So the next slide then is focusing on the location of MDI, and perhaps, this is the reason why the policy goal is to preserve MDI, because they are servicing markets that are traditionally and still, in many places, underserved by mainstream institutions. So as we can see on the right, we have a chart, which shows that the majority of Black banks and to a great extent, Native banks, or CDFI's, which means that their service area encompass a large portion of places that are low and moderate income. And the research is pretty unanimous in terms of understanding and mapping where those banks are located. They are more likely to be in distressed places, higher poverty places, and places that are at risk on several dimensions and measures.

In my research with Robin Newberger in the paper titled Minority Owned Banks In Their Primary Location Areas, which is published in Economic Perspective, a research journal of the Federal Reserve Bank of Chicago, what we have found are some results that add some additional facts to the debate on location. We compared MDIs with non-MDIs community bank peers in similar local service areas, and we find that even within similar markets, MDIs are lending to different customers that are relatively lower income customers with more credit constraints than those that are served by non-MDIs. So the fact that MDIs are serving a customer base with more economic constraints, that is more vulnerable in economic downturns means that the challenges of the communities are going to represent bigger challenges for this institution than if they were servicing more affluent, more resilient communities.

So in the next slide, then we have some numbers here regarding recent trends in the number of MDI by group. So at the moment of the Great Recession hit in 2008, we have 215 minority owned banks as of 2022. We have 146 of these institution remaining. Black banks has declined by more than half since 2008, confirming fears that these institutions are disappearing, and it's alarming if our goal is to preserve those institutions.

In the next slide, we trace what's going on with opening and closing mergers and acquisition for the MDI sector. So before the financial crisis, there was some mixed prospect in terms of what the trends in the numbers of MDIs was for access to financial services. So on the one hand, the MDI sector as a whole appear to have continued to maintain a presence in some markets to a greater extent than even the closure rates of these institutions would suggest in a sense that, during an active period of mergers, acquisition, and closure, we were seeing new MDI also being formed. And some of these MDI, when we look at other indicators, their deposit and their geographical footprints were remaining.

However, there is reason for concern in terms of the overall MDI sectors prospect for expanding subsequent to the financial crisis. Because in instances, we see, when MDIs have closed, there they being replaced by non-MDIs. So the next slide then also looks at not just these institutions, but also, their branches. And this story is, again, perhaps, not encouraging if our goal is to preserve bank branch presence access. Since the financial crisis, we see a bigger count in the loss of bank branch as MDI bank closes then we see count of branches of opened MDIs.

This is what this interesting slide shows. So the next one, so even before the bottom hit the barrel in the financial crisis, we were seeing a secular decline in banks, small banks, and that led to what we saw was an increased divergence or bifurcation in terms of presence of these institutions and branches and that we enforce disparities in low to moderate income neighborhoods. So that's the next slide.

So what we have shown is, really, that there is less access to banks and bank branches in certain areas, and that's disproportionately so in low to moderate income and minority places. And the question that some of us may ask is, does the presence matter with technology, which has large geographical boundaries for the provision of financial services and potentially may have reduced dependence on bank branch? Why should we still care? We should care for those of us who believe that providing financial services to people who live in more modest and minority communities requires the savvy to understand which applications are truly viable and, perhaps, also have a deep seeded commitment and understanding of a given locality, which small community banks are recognized to have been able to do a better job at doing, perhaps, more so than larger banks.

So there is quite a bit of evidence in the research to suggest, for example, the presence of those institutions in their branch matter. In the area of lending, for example, there is evidence to show that the loss of banks disrupts the flow of local credit, especially to small businesses. And also, in our own research in the paper, the impact of minority closing with Robin that was published in the review of Black political economy, we looked at the impact of loss of MDI and CDFI in low and moderate income places, and we saw that this leaves a void in credit that was not automatically adjusted in a given period of time in low and moderate income neighborhood as much as you see these adjustments happening in higher income neighborhoods as bank leaves and others come.

So the next slide then, albeit that shrinkage in the number of MDIs, how is the sector doing in terms of performance? So according to reports, like those put out by the FDIC on the state of MDIs, the sector is performing well on several measures, such as deposit, net income, efficiency ratios, equity growth, et cetera. And in the next slide, we can see an example of the growth in average net income, and we think, for example, the later growth coincide with some of the safety nets that's been explicitly designed to boil MDI and lenders caught in the grip of crises that are not their own making, like the pandemic. So we can see an increase in net income in 2021 and 2022, in part, as a result of funding boost.

And in the next slide, again, we can see the change in equity of MDIs who were a recipient of ECIP, which is Emergency Capital Investment Program, that injected $9 billion got emergency capital to low cost, long term capital investment to CDFI banks, credit unions, and Minority Depository Institutions. So we can see that the MDI were recipients. Their equity growth increase by more than 40%, which, hopefully, should allow them to broaden their intermediation efforts.

So next slide to conclude then, there are many public and private sectors entities that are developing programs to help support the MDI sector, so that they can expand their impact on communities which they serve. I would invite you, if you don't know, to, perhaps, consult our own initiative by the Federal Reserve System, which is a partnership for progress, which was created to preserve and promote minority on institution. Of course, I was also very pleased to talk about some of the research that we conduct here on MDI sector. So as concluding thoughts on the next slide, I would say that MDIs have played a vital role in providing banking services to minority and low income communities. Yet, I have shown that the sector's continuous decline makes it clear that it is at stake in terms of its continuous ability to respond to the need of those communities that are not served by other institutions in many instances. So the conversation that we are having today are important to get to the arc of the narrative in which those minority banks that help the poor accrue wealth or shun aside when the economy goes south.

I look forward to today's discussion on preserving access to minority banks in their communities. Thank you. I will pass over to the next speaker.

JUNG SAKONG: Thank you, Maude, and thank you so much to the Economic Mobility Project and for all of you here for this chance to share some of our research on bank branch access. This is joint work with Alex Zentefis at Yale, and let me repeat the same disclaimer that what I'm going to talk about are our own views only and not those of the Federal Reserve System. Next slide, please.

Previous research and popular commentators have established and argued for a link between having an access to banks and bank accounts and other positive outcomes in life, including access to credit, subjective well-being, wealth accumulation, and financial literacy. But we continue to observe persistent disparities in who uses the banking system by race and income. Next slide, please.

So, for example, when the FDIC asked American households in 2019 about their banking behaviors, one of the questions they asked was this, have you visited a bank branch in the past year? And when you plot the fraction that responded yes by the income of the household head, we see this pattern, where on the very left for low income households with less than $15,000 of annual income, only 2/3, 62%, said yes. On the very right for high income households with $75,000 of income or more, 85% said yes. Next slide, please.

And a similar picture emerges when you divide the respondents by their racial identity. So on the very left, among white Americans, 84% said that they have visited bank branch. On the very right, however, among Black Americans, only 69% said they have visited a bank branch with other racial groups falling somewhere in between. Next slide, please.

Now, you might say this is the 21st century. Why are we still talking about physical bank branches when many of us do our banking businesses on our phones and on the internet? And that is true, at least, for the high income households. So another question that the FDIC asked is they asked respondents, what is your most common method of banking? And when you look at the very right with high income households, again, with more than $75,000 of income, 69% of these households said that, yes, mobile and online platforms are their main method of banking.

But when you look at the very left on the low income households, again, with less than $15,000 of income, only 32% said that mobile and online platforms are their method of banking, whereas 61% said that going to the physical branch, whether to speak with a bank teller or to use the ATM, was their most common method of banking. And then, if we go to the next slide, then a similar picture emerges with the racial groups again, where among Black households, 50% say that they use a bank teller and ATM as their method of banking. Whereas when you look at white Americans, only 41% say that they visit a physical bank branch, while 56% say that they use mobile and online platforms.

So to summarize these, if we can go to the next slide, we find the persistent and robust pattern were among low income and Black households. While they rely more on bank branches, physical bank branches, they continue to use these branches less. So that raises the question, why? Next slide, please.

One candidate explanation that's been proposed is that these low income and Black communities have lower access to bank branches, which requires a particular set of policy responses. But existing research has produced conflicting conclusions on whether, one, access does vary in this particular way, or two, whether access can really explain the full disparity in use that we observe. And that's because there are these other demand related factors that provide an equally plausible explanation, and these demand related factors include maybe these low income and Black households have low cash savings, use the bank sectors with, or they might just have lower trust of the banking system that makes them use them less.

So in our research-- next slide, please. --we asked the question and try to answer, does lower demand or lower access explain the disparities we observe in bank branch use between these income and racial groups? We're going to try to answer this with a gravity framework, which I'm going to describe in more detail a bit later on and travel patterns from millions of mobile devices provided by a company called Safegraph, which I'll also discuss in more detail. Next slide, please.

So to fix the ideas, this is a map of Mount Prospect, Illinois, where my co-author grew up. That green dot on the left is a Chase Bank branch, a physical location of a Chase Bank branch. All these households from the blue dots are going to visit this bank branch, and think of this red rectangle as a neighborhood. I'm going to call it a neighborhood. It's a census block group encompassing about 1,500 people, and we're going to ask the question, what does it mean for this red rectangle to have higher access to bank branches? Next slide, please.

And the definition that we're going to use is this one. That red rectangular neighborhood has better access to bank branches if you have more of those branches near you and if those branches near you are of higher qualities. So it's a combination of both qualities and distances of bank branches near you, and this, I think, we think complements the existing research done on banking deserts and on banking access, which mostly focused on distances to the nearest bank or the density of bank branches in your area. But our definition is comprehensive and encompasses both the qualities and the distances of bank branches.

So what does this look like at the neighborhood level? Next slide, please. So we can compute that axis measure at the neighborhood level for about around 200,000 neighborhoods in the country. We plotted their axis values on the national map.

The rainbow colors, we divided the 200,000 axis values into 10 equal sized groups with red meaning lower axis and then more blue and purple colors implying higher axis. A couple of things jump out of the national map. One is that rural America has lower access to banks. That's something that we've known from the banking deserts literature.

The second thing is that the South, Southeast part of the country seems to have lower level of bank access, on average, than the other parts of the country. But the benefit of our measure is that we can really get granular, because we can really estimate these access measures at the neighbor level. So let's go into some cities. Next slide, please.

So if we go to Chicago, where we are, where I am, we notice a pattern, which is in the South, Southern part of the city, we see a lot of red implies lower access to bank branches. And then it becomes more blue and purple, implying higher access as you go more towards left and top. Another thing to notice is that, if you look at the scale, and again, these decile scales are for the particular map only, what that tells us is that there's almost as much variation in bank access within Chicago as there is across the country.

So just looking at, for example, Chicago wide or Cook County wide, measure of bank access is really going to miss this granular local variation in the amount of bank access. And if you're wondering why there is so much white space, the dots are placed at the center point of a given neighborhood, and some neighborhoods are bigger in less dense areas, which is mostly why you see a lot of the white space. Next slide, please.

Now, that pattern in Chicago is not the norm. A lot of cities have a different pattern, where, for example, in Houston, you see this pocket of purple, which is high axis in the city center, and it gets gradually more redder as you go outside towards the suburbs. And you also notice with Houston that the numbers are generally higher, implying higher access and average in the city compared to Chicago. Next slide, please.

Let me actually skip New York. Let's go to the next slide, please. Los Angeles is one of my favorite examples. So you see this deep pocket of purple, where Beverly Hills is, which is, of course, a high income area. So you might think, oh, maybe high income areas generally have high access to banks. But then you look at the coast, the beach area, which also is a high income area, and they have low access to banks as implied by the red.

So that brings us to the comparison in the next slide, where we want to really get at which areas, which neighborhoods by race and income have better access to banks. And we want to compare to neighborhoods that are more apples to apples comparison. I'm going to compare two neighborhoods in the same county, the same month, and the same urban suburban, rural category and control for the age groups of the residents, because that's a strong predictor of who uses physical bank branches. And we come up with these two. We find these two patterns.

Low income communities actually have better access, and what that 7% means is that, if we hold demand constant, doubling income is going to predict the lower visits to bank branches by about 7%. Now, at first, that might be puzzling, but then it might also make sense, because high income households tend to live further away from commercial areas. Now, controlling for income, Black communities have worse access.

So again, holding demand fixed relative to all white community and all Black community is going to have 5% lower visits to bank branches. Next slide, please. And given that result, for example, that Black communities have lower access to banks and given our definition of access, which is a combination of qualities and distances, you might ask, is this because there are bank branches near Black communities, but they are of lower quality? Or is it there are just no bank branches near Black communities at all?

So to do that, we turn to a decomposition on the next slide. We can decompose the total axis measure that we've estimated into an average proximity or an average how far banks are from you and not just the nearest one, but a whole set of banks near you. And then on average quality, which is, if we were to really adjust that absolute distance to all the branches, are the nearest branches to me higher or of lower quality? And when we do that and run the same similar comparisons-- next slide. Again, comparing two neighborhoods that are very similar, we can see how the differences in access decomposes into these two components.

So for low income communities, the banks that are nearer to them are of same quality as those near high communities, but again, low income communities just happen to live closer to bank branches. For Black communities, it's, again, the proximity. When they do travel the further distance, the branches that they face are actually of a slightly higher quality. They're located much further from these bank branches, so that they combine to produce lower access for Black communities. Next slide, please.

So before proceeding, I would like to talk a little bit about the methodology that has given these results, so again, focusing on that map of Mount Prospect, where you have these flows of visitors from this red rectangle neighborhood to that green dot, a Chase Bank branch, in this case. Next slide, please. So why might there be more flow of visitors from a given neighborhood to a particular branch? And we divide those multiple factors that affect that decision to three separate factors.

One is that there are neighborhood specific factors. Some neighborhoods have higher demand, maybe because they have more wealth. They have more leisure time. They might the banking system better, and so on, and so forth. And there is a set of branch specific factors, and we call these quality.

Some branches might offer better products or services, or they might be located in areas, where you might enjoy some of the amenities that are next door. And then there's a travel burden between the two places and how much it hurts to travel, and this is what economists call a gravity framework, because there's two masses on another side. And there's the distance between the two that determines how much gravity there is between the two masses. Next slide, please.

And we estimate that gravity relationship, which I just showed you earlier, using data from Safegraph, and Safegraph is a cool source of data. What they do is that they gather all these pings that all our cell phones send to different apps, and they sort of use those to locate where people live and where people visit throughout the day. But you might say that's a bit scary that researchers might get access to such granular data. So what Safegraph does is they aggregate those data up, and then they also jumble it up before they give it to us researchers to protect the privacy of the cell phone users from whom the data come from.

Now, our job as researchers is to come up with methods, so that we can estimate precise relationships with that jumbled up data. And I think what we end is really the best of both worlds, where we have this powerful data based on cell phone devices, while really protecting the privacy of the cell phone users. Next slide, please. So again, going back to this gravity model, estimating this gravity model for us gets us the relationship in the next slide by combining this across branches for a given neighborhood. Next slide, please.

What we can do is that we can really look at both the access and the demand for bank branches for a given neighborhood, which combine to produce the expected number of visitors to any branch, again, combining all the branches near them. So we can talk about how access differs, what we have done before, and also, talk about how demand differs between neighborhoods and really use those two together to explain what fraction of the observed gap in bank branch use. We can explain by each factor. Next slide, please. Next slide, please.

And when we do that, we arrive at this final set of numbers. So let's focus on the left panel, where we look at the gap between low income and high income households. As we saw before, access is higher for low income households by about 7% when you double income. But as you see, demand is much lower for low income households.

So if we held access fixed, low income households would visit bank branches about 23% lower than higher income neighborhoods of about double the income, and they combine to produce a lower branch use that we see in many surveys. When you turn to the right and look at the Black, white gap now controlling for income, as we saw before, Black households have lower access. Now, the most striking thing, I think, in our research is that the demand actually is comparable between Black and white households.

So a lot of these explanations that rely on Black households having lower demand for bank branches, such as distrust, or low savings, or whatnot, don't seem to be a major factor in our analysis. And again, because access explains most use, we end up with this gap in use between Black and white households that, again, we observe in many surveys. Next slide, please.

Now, given our framework, we can also analyze what different policy proposals that act via bank branches will do in terms of closing the inequalities in bank branch use that we observe. One example of that is postal banking, which proposes to turn USPS offices into bank branches, basically. And we find that the impact of postal banking on the bank use gap is going to depend not just on the branch locations, but what qualities those bank branches end up becoming when you turn these postal offices into bank branches.

So, for example, when we look at the Black, white bank use gap, if we turn all the USPS's offices into bank branches, but those branches happen to be of low or medium quality compared to the rest of the bank branches, that's actually going to widen the gap in bank use between Black and white households. But if those postal banks end up becoming of high quality compared to the other bank branches, that can actually narrow the gap in bank use between Black and white households. Next slide, please.

So to conclude, in our analysis, we found that bank access varies significantly, even within small, local areas and correlates meaningfully with neighborhood characteristics, such as race and income compositions. We find that two communities that have low bank use, low income and Black communities have opposite stories for why they do so. For low income communities, they have better access, but they have much lower demand, which ends up with their lower branch use. While for Black communities controlling for income, they actually have similar demand, but they have much lower access, which leads to their lower branch use.

So we're going to have to come up with different policy responses to address the banking gap for both on the racial margin and on the income margin. On the methodological side, we think these mobile device geolocation data are a powerful tool to understand how households interact with complex ecosystem of financial institutions. Again, thank you so much for your time, and now, I'll turn it over to Kristen.

KRISTEN BROADY: Thank you so much, Jung, for that enlightening presentation. I now have the pleasure of introducing our esteemed panelists. Mehrsa Baradaran is Professor of Law at the University of California, Irvine and author of "The Color of Money, Black Banks, and The Racial Wealth Gap." Anthony Barr is the Research and Impact Director at the National Bankers Association, and Greg Brown is President and Chief Executive Officer at Southside Community Federal Credit Union.

Unfortunately, Makada Henry Nickie, the Executive Director of the JP Morgan Institute, is unable to join us, but I am happy that our other panelists are here. I am looking forward to this discussion, and I am happy to turn things over to our moderator Jonnelle Marte, Economics Reporter at Bloomberg News. Jonnelle, I'll turn it over to you now.

JONNELLE MARTE: Thank you very much, Kristen. So we have a great team of people lined up today. Let's jump into the conversation. Mehrsa, I would like to start with you.

I'm sorry, Mehrsa. So we heard from our presentation about some of the difficulties and how, even though we have had government programs and initiatives put in place to increase financial access and financial services, we've continued to see a decline in these Minority Depository Institutions. So can you speak a little bit to how much of a difference these institutions can make in the community, and what else can be done to increase the number of them?

MEHRSA BARADARAN: Thank you. First of all, thanks, Jung and Maude. Those are amazing. I read both papers, and I love the data use. It's just a very thorough collection of data and a very unique and creative way of exploring this question that I wish I had this study when I was writing both of my books. Because this is something that I wanted to be able to say, but I got kind of intuited. And there are ways between the numbers. But to have such a great and thorough confirmation of what some of us have been saying is really wonderful, and it's just such a creative, cool way of doing it through the geolocation. So I want to make a couple of points. One is that, when we're talking about access to banking, we're not just talking about the products that you get.

We're looking at access to the rails of the commercial system of the entire country of commerce. As we're all going into the digital world, to not have access to a bank branch can mean for someone who is in one of these communities, and it happens to be low income, that you're paying to check cashers, payday lenders, all sorts of high fee type accounts. And if you're not at an MDI, maybe you're at a big bank, and a lot of those larger banks sort of have a fee based business on the lower end, such that, as we saw with some of the files released by regulators, the lower income-- and I won't name the banks. But lower income customers of banks subsidize the higher income customers through overdraft fees and things like that. So there are several tolls that you're paying just to use the rails that are public rails.

I mean, this is the Federal Reserve. As we all know, banks are a charter that allows for an access into what is a public system of commerce through the payment system. So that's one. The second point I want to make is that all of this is rooted in this history, and there's the history, and then there's what's been done.

And I think we tend to overestimate what's been done to remedy and underestimate what was purposefully done to segregate for many, many, many years, hundreds. There was purposefully no access into those Black home communities. The only banks that would serve those communities were Black owned. There was no designation at the time, because we were talking about the Jim Crow era or the New Deal era, where it was very clear that the white banks had no services that could be lent, especially mortgages, because FHA mortgages were all racially designated in certain areas.

So we're talking about a newer problem, post-Civil Rights era, where lenders are no longer allowed to discriminate. How do you remedy these situations, which brings us to the next point is there have been government programs, but none as my book, "The color Of Money," shows have been targeted at the problem itself. There have been some programs and some helps, and this is an example of one of these things. But these programs cannot shoulder the weight of a history of discrimination, so there's just an urgent problem, I think. And this is one aspect of larger ones, and we saw during the PPP loan, for example.

Even when you had a benefit that tried to go to these communities, because the rails weren't there, a lot of the money that was supposed to go to the lower income communities got stuck in the big banks, because that's how sort of the infrastructure has been set up. So those are the two things that kind of contextualize this, and as far as-- you know, we could talk more about what can be done. But I think that I've given enough for your one question.

JONNELLE MARTE: I like how you talked about it in terms of the rails. I think that's really a good visualization. So another program that exists is this Minority Deposit Bank Program, and the goal of this program is directs the US Treasury Department and other government agencies to place deposits with minority owned institutions. However, that can lead to a lot of volatility. So, Anthony, let's come to you here for this. Can you explain why we see that volatility in deposits, and what that does for banks, and what can banks do about it?

ANTHONY BARR: Certainly. Yeah, so deposits are kind of a weird thing, where on the one hand, they're an asset to your bank. They're part of your capital that allows you to go out and do more lending, and on the other hand, they're kind of a liability, as well, right? If they're interest bearing, that means you have to pay to hold the deposits.

So one of the things that we've seen happen, for example, GN Bank in Chicago, a Black bank, took in millions of deposits from city government and other sources as part of this kind of broader racial equity commitment. But they weren't able to increase the lending sufficient to cover the cost of holding those deposits, so there was media coverage about having to return some of those deposits, unfortunately. So I like to think of it as a three legged stool, right?

You've got your tier one capital. You've got your deposits, and then you've got your lending activity. And all three things affect your ability to scale up. So right now, with MDIs and CDFIs, we're actually way more capitalized than we've been, in part, because of Maude's point about ECIP investments, equity investments from some of the major banks as part of their 2020 pledges. So you can, obviously, still use more capital.

We're still only controlling less than 2% of all of the assets in the banking sector, but way more capitalized. Some of our members have doubled their asset size, for example. Now, they are in a position, where they actually need more deposits in order to support more lending. But to the point of GN, you have to be careful to make sure that when you're bringing in a bunch of new deposits, especially if it's a quick influx, that you're able to match that with the lending that you're doing.

One of the other things that you run into then is you can be in a chicken and an egg situation, where you're not big enough to actually do some of the financing of projects that would actually let you grow as a bank, because you don't have enough deposits. But if you aren't given the opportunity to scale, then you're always going to stay in that smaller space. So I'll give an example on the positive side.

The Atlanta Hawks did a syndicate deal, right? So they have, like, a $35 million refinancing of a sports medicine and training facility, I think, based in Atlanta. So they wanted to go to Black banks and have them be part of it. But they knew that, if you go to just one bank and it's a small bank, they're going to say, hey, we don't have the balance sheet to support doing a deal like this. So in times past, that would just mean you don't get to participate as a bank. Well, this is an opportunity to grow, but you're just not going to able to participate, because you're not big enough, right? And instead, what they did is they brought in several Black banks. I think it's something, like eight banks, to do a syndicate deal.

So now, it's shared across those books. Now, each of those banks can take on more deposits, can increase their lending activity elsewhere and benefit from that development project, because there was kind of a strategy about how you're going to pull those in. So I'd just say kind of, in general, right now, we're at a point, where as we're thinking about what's the next step for MDIs and CDFIs, it's making sure that you're addressing all three legs of the stool and specifically making sure that there's opportunities to expand the lending activity to match some of the deposits and capital.

JONNELLE MARTE: Greg, as a president of a bank, is there anything else you would like to add about how this volatility in deposits can create challenges?

GREGG BROWN: Yeah, I think Anthony pretty much broke it down, what the challenges are with deposits, because they, basically, lower your net worth, unless you are able to deploy that capital in the form of loans to communities that can pay it back. So we have to maintain adequate capital to asset ratios. So if you think of it in terms of, let's say, 10%, whatever you have in deposits, keep, at least, 10% in capital. So as I see it, systemically, this is one of the barriers that's preventing an infusion of capital into community owned financial institutions, Minority Depository Institutions is because there's not enough capital there for these communities to take their money back and reinvest it in themselves to expand their base, like a pebble in a pond.

JONNELLE MARTE: One thing you must be dealing with a lot is this growing use of technology, right? So it's the digitalization of banking. We have people using it for deposits, accessing loans on their phones, all kinds of innovation. However that is, that does create security challenges, and it is expensive.

I'll stick with you, Gregg. Can you talk a little bit about the costs of implementing technology? And what do you think needs to be done to help increase your accessibility to the public, but also, managing that technology in a way that's secure, but also, cost effective?

GREGG BROWN: Yeah, and that is a challenge, because many of these banks that are leaving the community, they were able to-- go back to 2008 when they got the government bailout money disproportionately to Minority Depository Institutions. They were able to build a stronger digital platform that enabled them to capture a greater market share of even the communities that MDI serve. So on the liquidity side, you almost have to digitize to get the deposits, but you need the capital to be able to take the risk to lend it out. So if there's any government resources are available that could assist in investing in these MDIs, CDFIs, community development credit unions, that would be the route to go. Because these community owned financial institutions are the financial heart of the community that pumps the economic lifeblood through it, so it would be in the best interest of everyone to get behind these institutions and increase their capacity to serve underserved communities.

JONNELLE MARTE: Anthony, is there anything else you would want to add to that in terms of solutions and managing costs?

ANTHONY BARR: Yeah, I have so much to say. I'll try to keep it brief. I'll start by just saying, you know, Mehrsa raised the PPP lending, and one of the analyzes that we did is to show that 79% of MDI PPP loans went to LMI, or majority minority, or both communities versus only 49% of non-MDI PPP lending. So a lot of that lending was through partnerships with online platforms, especially early on to deploy loans, but it was still able to be directed in a mission driven way. And to Greg's point, the institutions that were able to have digitalized prior to 2020 and 2021 were in a much better position to kind of turn the dial and immediately get out a lot of capital to communities and small businesses that needed it, while also being able to expand their balance sheets too.

So you think about kind of what that ability to have that lending look like in terms of your bank's business model. So that's just kind of one example of why digitalization matters. There's other forms of kind of consumer facing, mobile banking, remote capture of checks, all those kinds of things. But on the back end, I think, is actually where a lot of the benefit matters for mission driven lenders and the banking sector as a whole, right?

It's things, like helping lift capacity by automating some of your administrative tasks. It's helping streamline your underwriting processes. It's helping take your data that you're collecting for compliance and actually being able to leverage it for market analysis or forecasting the macro environments.

You can kind of plan for different rate environments, and things like that, and then even things, like tailored marketing and cross-selling based on kind of data about how your customers are interacting with your bank. Those are all things that the big banks are currently already able to do, because they have the infrastructure in place for it, and they've got huge data sets that they're working with. A lot of the mission driven lenders don't have that infrastructure.

So on the cost front, it's two kinds of costs. It's the upfront costs, which are often fixed to buy the tech stack that you need to get partnerships with the vendors that are going to help you. So not only are you disadvantaged as a small entity in trying to pull together that capital initially to cover the cost as Gregg was saying. You also recoup that investment at a later time than the big banks, right?

If you're saving cents on the dollar for every loan that you're doing based on this new underwriting system, but you're only processing a few hundred loans a year, you're going to get your investment back much later than a bank that's doing thousands of loans per month, right? So in both ways, that initial cost is very daunting, and then the ongoing costs, cyber security, fraud mitigation, compliance, all of those kinds of things are ongoing costs that you have to then be able to cover through your lending. So especially in the early days, when you're scoping out what's the budget for that, you might not even know what those costs will look like beyond guesswork.

So it's challenging to integrate there. So I would just say in terms of support, it's things, like investments that are tailored toward digitalization or partnerships that specifically help to build out the infrastructure of technology at mission driven lenders. It's things, like loaning an executive or an IT from your corporate firm to spend a year, have their salary paid, spend a year focusing on implementing some kind of digital project. It's things, like new boutique firms in the market who can specialize on the smaller institutions and prioritize their needs, so that you're not kind of put to the back of the line.

And priority goes to the big banks that are doing high volume. Like all of those things, I think, come into play and then, of course, just capital, capital, capital, right? Because this is just one of the things. If you're undercapitalized, you fall behind on the digitalization curve, and then all of the advantages and economies of scale that you could achieve through digitalization, you also are behind on that as well.

JONNELLE MARTE: So, of course, technology is important, but there are other reasons why consumers say they don't have a bank account. There was a 2019 survey from the FDIC, and they found that the top five reasons for not having a bank account were either not having enough money to meet the minimum required balance, not trusting a bank, avoiding a bank, because they think that might give them more privacy, or the fees were too high, or that the fees are too unpredictable. So, Mehrsa, let's come back to you. What would you say are some of the policy solutions that should be considered to address these concerns that we're hearing from consumers about why they don't have banks?

MEHRSA BARADARAN: Yeah, so the one I came to is the same, luckily, as the one that Jung and co-author came to, which is that you would want to consider-- and it's one that you don't have to recreate the wheel on every single thing. You really can go to what's worked across the world, and in American history, this has been a problem. And the way that it's been solved is to use another government institution that is in every neighborhood, that is tied to the Treasury just as banks are, and that's the post office.

So we've had postal banking in America from 1910 to 1966 through a partnership with Black owned banks, where the post office would be the front, where you would go and have an access point. That's the problem, the brick and mortar. You don't have-- we're not all Chase. We can't buy up every bank in the country, but we don't need to do that.

We're talking about simple banking. We're not talking about loan syndicates as Anthony was talking about. We're talking about just-- because there's two different things, right, that banks do? And one is just payments, and that's the main one that the studies, as I read them, focused on is you just need to go to the bank to put your check there or something, right? And that's very simple banking.

In today's technology, with today's technology, there's no excuse for communities to not have those simple services, where you get paid in cash. You want to go put in a check or vice versa to get cash out. And as we're increasingly going, those communities are going to be left out and forced to pay this cash tax as people go digital.

So postal banking is an obvious one. Again, it's sort of just one of these things that, if you look at history, it makes sense. There are others, of course. I mean, we can work with other institutions that are in these neighborhoods.

It just needs to include-- there's several things. As the study points out, you have to have an access point, and it has to be trustworthy, OK? So what you see in a lot of the history of this is when the banks left, or if they ever were there at all in Black communities, they weren't. But if the Black owned bank failed, or as the banks merged and moved out, there was a filling of that void, and it was done by these high cost lenders. And there's also studies that show that these lenders have a very specific strategy of gaining trust by kind of the storefronts pretending like they're part of the community, where actually, they're as part of a big corporation as any other business.

So you're kind of competing on trust and access. So any institution that can do that will be able to bank people, and trust is not-- especially these communities, trust isn't something you can market. You've got to earn it.

JONNELLE MARTE: Gregg, it's looks like you were going to continue on that.

GREGG BROWN: I would agree 100%, Mehrsa. Trust is very, very huge, as well as access, because, well, people have got to trust you. And when we look at the history of banking and going back to 1977 with the Community Reinvestment Act, which was supposed to be a mandate for large financial institutions to help revitalize low income communities, what I've seen from my experience is these institutions came, and they competed.

They created a fierce climate of competition, even with the Minority Depository Institutions that were there with all of the bells and whistles. So now, today, we have half as many Black owned banks that we had back then. And with the larger banks now closing, these access points in the community, you're left with minority owned, community owned financial institutions to carry the weight and fill the gap that has been left, but have the expertise, as well as the trust, of the people they serve. Because in many times, they are the same people.

So when you see the banks closing the branches, that's viewed as a disinvestment rather than the original intent of CRA, which was to reinvest. So I think that we ought to be open to all possibilities of creating more access points for community banking in an effort to level the playing field, but keeping in mind that it's more than just access. It's following the money trail to the end of the day. Who has the money has the power, so who is going to invest in the people? And that's where relationship banking comes in. It's hard to build trust without having a relationship with the very people that you are there to serve, and to digitize without that relationship makes that those access points a little more challenging. So I just wanted to share that.

JONNELLE MARTE: That reminds me of another important point that we saw in the presentation, which is that there are not as many bank branches in Black communities, and that does increase the transportation costs for those consumers. And it creates other barriers. So, Anthony, maybe you can hop in here. Talk about that. Why aren't there more branches in those communities, and what does that mean for the households affected? And then, of course, what are the policies that should be considered to remedy that?

ANTHONY BARR: Yeah, so I think, certainly, there's some transportation questions that we could tackle as transportation policy. We could talk about, if it's an urban setting, what's the level of investment in public transit, right? Because not everybody has a car. Or what are we doing to add safer, wider bike lanes, so that people can get where they need to go safely, even if they're not driving?

But I think what you're pointing to is more fundamental, which is why are banks not showing up in these communities in the first place? And I think separating out income and race is really helpful here, because I think, typically, the talking point is, well, it's just it's a low income neighborhood. The deposits aren't going to rise to the level where it makes sense having a brick and mortar presence, blah, blah, blah. And what we're actually seeing is like, no, it really is race, right?

Like, yes, class plays into it. Yes, the business model with low income, deposits plays into it, or demand plays into it. But there is something inescapable about race. So now, we can start to quantify racism in America and talk about is it perceptions of safety, which are often unmoored from actual crime rates or things like that, but the perception of like, oh, this branch isn't going to do well, because it's in-- and, you know, you're not going to have documentation in the CRA environment of executives making claims explicitly on that.

And they might not even be consciously saying, oh, this is a Black area. We're not going to show up, because it's a Black area. But in practice, the kind of broader structural biases and prejudices absolutely show up in terms of you're not showing up in communities, where there's need, and we know there's need.

Because as Mehrsa pointed out, payday lenders, cash checking, they're all showing up in these spaces. So I just think the claim that it's primarily a business model decision, I think, just doesn't actually get borne out when you start to disaggregate the way that the presenters are doing today. So that just leaves a confrontation of like, how are we going to address the racism in the financial sector, and what are we going to do to respond to it?

JONNELLE MARTE: Yes, Mehrsa, I think, maybe there might be anything more you might want to say here about what's behind it and what can be done to improve that access?

MEHRSA BARADARAN: Yeah, I mean, there's-- thank you for bringing that up. I mean, I want to focus on the system part in systemic racism in that you really can have well-meaning banks and corporations keep doing these patterns, because it's baked into the system. And one of the ways it's baked into the system is, I mean, it's so almost, like, to the core of it, but it's risk analysis. It was created in the FHA when you're underwriting, and the first indication of underwriting, the first thing that they put on those forms in 1934 that lasted till 1978 was the race of the community.

So when you're looking at the risk of a neighborhood, you're looking at the race of the community. That was embedded. So now, you put, on top of that, credit scores. You put, on top of that, any risk profile. You can literally take race out.

You can take out zip code, and you're still going to end up with race. You're still going to end up with those disparities because of these tracks of segregation. We didn't run them through these Black neighborhoods, and you can see it in the benefits and in the-- so when there's a flood, it's going to flood the Black area, first.

You saw with COVID virus, colorblind, the highest deaths. We forgot some of these numbers in the mix, but the highest deaths because of the lower hospital access or whatever were in Black communities. And then the PPP goes on top of that, and then you see that money didn't come through either. So it's just a topography that was created around that time, where you can layer on risk analysis.

You can layer on any sort of underwriting that you're going to do, even an algorithm, where we reproduce those same exact things. And part of it is capital, but it's capital in a broader sense. I think, as Anthony said, a lot of people have these biases that are baked into, also, the system. One is the safety. Two is-- and I, honestly, don't think we invest in Black communities. And I don't mean this in a small way. I mean, we don't think that there is something to be invested in, and we haven't done it.

We may say all sorts of nice things. But if you look at the track record of where we invest for growth, there's something about us not believing that these communities are worthwhile. And we can talk about all of these numbers, but when the government knows, the government, us, the market knows how to grow a business. You go to venture capital. They can put in money, seed capital, and then you've got angel investors all sorts of ways up. And we continue to invest in, like, the likes of Sam Bankman-Fried for lack of-- I mean, we invest in certain types of genius, while ignoring other kinds of genius that has rarely been invested in. It's really just money sitting on the table, I think, for investors to pick up. Just change the mindset.

JONNELLE MARTE: That also brings me to the point that with the gaps that we've been discussing, a lot of non-bank institutions are stepping in, and that could be a check casher, which you mentioned earlier, or a payday lender, and then, of course, a lot of online options that are popping up. So why are they able to thrive in some of these communities and fill that need or attract those customers when banks are not able to? So if you want to chime in here, Mehrsa, more or Gregg, as well.

MEHRSA BARADARAN: I mean, these, they're charging an arm and a leg, you know? So they're able to thrive. Because if you want to send money somewhere, it's $10. If you want $100, it's 10%. So low income communities pay something, like 10% of their income, something like $2,500 a year for fee that-- if you have a bank account, and if you have a moderate amount of wealth, you don't pay those fees.

So these are businesses that are, basically, just usurious lenders and are in the communities, because that's where the high risks were cordoned off. It's a different business model. You don't see those payday lenders competing in high income communities. Those are businesses that just work in poor areas.

GREGG BROWN: Yeah, they represent profit over people. So they do business in a very predatory manner, but they understand the behavior of the population that they're targeting for profit. So they wouldn't be considered a trusted channel that, as I look at it, when we engage in any kind of banking transaction or exchange of money, we've got to look at, is that transaction transformative? Will my family be better off? Will the community be better off?

Will we alleviate poverty in the communities that we live in? So we need institutions that actually have the value that value the people they're serving, and that's something that you can't make. You can't make that up. So that's why policy is needed to ensure that there are fair practices in how we handle our money at every level.

ANTHONY BARR: And I would just add, too, I'd like to rhetorically ask, what's the difference between a payday lender that charges 300% on a 30 day loan and a lender that charges 600%? And it has nothing to do with their business model or marginal cost. It's really, what are the state laws that operate in the place that they're doing lending? What can they get away with, right?

So if you think about the position that you're in, if your car breaks down, you don't have savings to repair it, if you can't get to your job, you're going to lose it. You're going to accept whatever terms you're presented with, really, like you don't really have-- that vulnerability is going to make you price insensitive to kind use the economic term. So it's similar to insulin, right?

If McDonald's jumps the price of a burger, you're going to go to Wendy's, and that's fine. If you don't get insulin, you die. So the price setting power of those firms is enormous, and that's where we've recently seen federal government step in and say, hey, you can't actually charge above this cap. So for me, kind of all these things start to fit together, right?

The big banks aren't operating in these specific communities. There's huge market need, deep financial vulnerability. That market failure allows for other institutions to come in with price setting power to price gouge. And I would just say the claim that, oh, we have to do this in order to be profitable, which is the claim that the big banks will sometimes make for why they're not there, MDIs, and CDFIs, and credit unions were in these communities year after year after year profitably, right? If we weren't, we wouldn't keep the doors open, and that kind of puts the lie to that claim that you have to have those rates in order to stay profitable. If you don't, it's just the price setting power if there's not market competition.

JONNELLE MARTE: So we're coming up on our last minute here. Is there anything else, very quick thoughts on what the panelists want to say about how banks and minority institutions can work either with community groups or with some of the bigger firms to help close this out?

GREGG BROWN: Well, I would really like to see an Amendment to the Community Reinvestment Act that would mandate these financial institutions pulling out of the community to leave some capital behind. If they were not judged on how well they invested in those communities, while they were there, and if those communities will result in banking deserts, then they should not be able to close for profit. There's got to be an investment left in the people in the form of capital or partnering with CDFIs, community development credit unions, community owned financial institutions. And I think that would be an effective way of addressing the access issue, as well as building a stronger economic infrastructure at the community level.

JONNELLE MARTE: So thank you everyone for this wonderful conversation. Just to round out, a few of the things that really stood out with me is how this is an important aspect of keeping people with access to the rails of the commercial system, as Mehrsa said, capital being very important for these minority institutions, and then, of course, this concern of predatory substitutions that might come in, like firms that might be choosing profits over people. So thank you everyone for the lively discussion. And now, we're going to turn it over to Nicole Elam, who is President of the National Bankers Association, with our closing remarks.

NICOLE ELAM: Good afternoon. I'm Nicole Elam, President and CEO of the National Bankers Association. I'd like to thank you for joining the Economic Mobility Project at the Chicago Fed for today's event on minority owned banks and banking access to minority communities.

The National Bankers Association is the only trade association solely focused on preserving and promoting minority owned and operated banks across the country. For over a century, minority banks have been at the center of building wealth in communities of color by providing access to financial services, small business loans, and mortgages often when other banks would not. These banks serve communities that are 77% minority, that are two times more likely to be denied a small business loan, even when they have the same credit profile as their white counterparts and that are two to three times more likely to be unbanked or underbanked.

That's why preserving, promoting, and partnering with minority banks is so important. So whatever seat you sit-in at government, a corporation, or a nonprofit, I encourage you to find ways to support minority banks by making a deposit, driving capital or grants to these institutions, or banking with them, among other things. And if you need help finding ways to partner with them, please, reach out to us at the National Bankers Association. And now, I'll turn it over to Kristen to close out the program.

KRISTEN BROADY: Thank you so much, Nicole. And I would like to thank our panelists Anthony Barr, Mehrsa Baradaran, Gregg Brown, and our moderator Jonnelle Marte for such a rich discussion. I'd also like to thank Jung and Maude for their very enlightening presentations.

We'll be sending a post-event survey, so please, be on the lookout for it. We value your feedback, and we hope that you'll attend future events. I want to thank all of the audience members that came today. We appreciate those of you who sent questions.

Please, check out the recording that we will be posting on the Chicago Fed website and have a great afternoon. We hope to see you, again, soon. Thank you.