There are many crucial issues that US banks will be caught up in as the country enters a new presidential cycle. But there is one which they can help solve, with or without the help of whoever occupies the White House in 2021.

Potus intray

US banks are bracing for a challenging few months and years. The Federal Reserve Bank of Minneapolis, in its latest assessment, anticipates 18 months of rolling lockdowns as the economy opens and closes, before a full recovery from the Covid-19 pandemic may even begin. 

On top of that, there is the challenge of the November US presidential and congressional elections, with the prospect of a much bigger swing of the pendulum than usual if Joe Biden, the Democratic presidential candidate and former Obama administration vice-president, replaces Republican president Donald Trump in the White House. Mr Biden’s administration is likely to put an end to deregulation in both banking and the environment.

Mr Biden plans to bring about a “clean economy revolution”, the country’s biggest ever push to combat climate change, with a target of using only renewable energy for electricity and transport by 2030 and achieving net zero carbon emissions by 2050. Inevitably, such a transition from a fossil fuel-based economy would present banks with a challenge, but also an opportunity, both in terms of external investments and internal changes. Will major US banks press ahead with these adjustments even if Mr Trump, considered to be a climate change denier, wins? Many think so.

Meanwhile other differences between the two presidential candidates are apparent on factors that will directly or indirectly affect business and finance, from healthcare to public spending and the best way to deal with China.

Growing social inequality

Yet the most sensitive issue facing banks, as employers as well as providers of financial services, centres on the nationwide reckoning that is taking place on racism, and economic and social inequalities suffered by 40 million black Americans. Disparities have been laid bare by the coronavirus pandemic and by police violence, with the May killing of George Floyd, an unarmed African-American, by a white police officer in Minneapolis. This has been a tipping point for the country, igniting protests up and down the nation.

The racial wealth gap between black and white Americans is now a central issue. Financial regulators, think-tanks and academics have noted a widening of this gap in recent years. Various studies conclude that white Americans are, on average, many multiples wealthier than African-Americans when measuring assets like home ownership and stock and bond investments. Data from the Federal Reserve shows that as of the first quarter of this year, black households held less than 5% of total wealth in the US, while white households owned nearly 85%.

The most sensitive issue facing banks... centres on the nationwide reckoning that is taking place on racism

Further, the Institute of Policy Studies noted that, although the situation has improved over the past four decades, in 2016 black and Hispanic families were twice as likely than white families to be unable to accumulate any wealth at all. The think-tank’s analysis is based on National Bureau of Economic Research data and a Federal Reserve survey of consumer finances published in September 2017. 

Black American communities have also suffered disproportionately from the pandemic, reporting both the highest mortality and virus-related unemployment rates. What is especially damaging, in terms of these communities’ economic recovery and growth, is that only less than 20% of black-owned businesses that qualified for the government’s small business Covid-19 relief programme, the Paycheque Protection Programme, succeed in securing loans, according to a recent Federal Reserve study. Black businesses experienced the most acute decline between February to April, with a 41% drop according to the study. In all, out of 1.1 million black-owned businesses in the US, about 440,000 failed by mid-April.

US chart 1

Inequality by design

There are, obviously, historic issues that explain the wealth gap. Slavery, which excluded black people from inheriting wealth, and segregation and redlining — an illegal practice in which banks refused to lend in black or other minority or low-income neighbourhoods.

Fast-forward to recent years and the issue increasingly relates to black Americans’ lack of access to mainstream financial services, like opening a chequing account or obtaining a mortgage or a small business loan, which most white Americans take for granted.  

Federal Deposit Insurance Corporation (FDIC) data show that less than 46% of black households were fully banked in 2017. Added to this, according to the FDIC, even the rates charged by non-bank financial institutions, like payday lenders and fintechs, which poor, mainly minority neighbourhoods often rely on, are higher for black customers than anyone else. 

A reduction of the number of bank branches since the 2007–2009 financial crisis has also had a deleterious impact. A study by S&P Global Market Intelligence found that majority-black neighbourhoods lost more branches between 2010 and 2018 than all other communities.

The study also found that the nation’s two largest banks, JPMorgan Chase ($2.6tn assets as of June) and Bank of America (BofA; $2.5tn assets), played significant roles in reducing their branch numbers, doing so at much faster rates in majority-black communities than elsewhere in the country.

These rates were 22.8% versus 0.2% for JP Morgan over that period, and 29.1% versus 18.4% for BofA. When contacted by The Banker, both banks took exception at the specificity of study saying that their own internal data collection looked at the majority-minority census tract, rather than on specific ethnicities, in the case of JPMorgan, or on the low-to-moderate income census tract, in the case of BofA.

For Wells Fargo, the S&P’s study figures moved in the opposite direction, with 2.2% closures in majority-black areas and 10.4% elsewhere. For the rest of the industry, the numbers were 14.1% and 10.4%.

There are several reasons for branch closures in the industry, including the growth of digital channels and pressures on profit margins. But Stella Adams, chief executive of SJ Adams Consulting, a North Carolina-based civil rights research and consulting firm, says that closing a branch can be “devastating” if it is the only one in an area. Analysis shows that for a low-income black household, when the household does not have access to a car and public transport is unreliable, reaching a branch only two miles away is a considerable challenge that contributes to financial exclusion. 

Making matters worse, according to the FDIC, about 1000 small community banks collapsed during the financial crisis and, in recent years, the number of black-owned banks has fallen by 50% to just 21.

chart 2

Helping small banks

Melissa Bradley, a McDonough School of Business professor at Georgetown University, says it is important to recognise the significant challenges these small banks face. Ms Bradley specialises in minority depository institutions (MDIs), where over 51% of capital is owned by ethnic minorities and which focus on taking deposits and lending in predominantly black and Hispanic, low-to-moderate income communities. “First, they [tend to be] under-capitalised and that determines what they can and cannot do, in terms of product [creation] and the number of loans they can get out of the door. They [are considered to] have a higher risk profile,” she says. “Second, due to their [capitalisation and lower amounts dedicated to internal investments], these institutions lag behind in [terms of] technology, and fall below white-run banks in services like digital and banking apps and ATM networks.”

Lastly, Ms Bradley adds that “because these banks operate in economically distressed areas where customers typically have less cash and capital, their income is more precarious. These banks don’t have anything like the dependable deposit base that a larger institution has.”

Melissa Bradley

Melissa Bradley, professor, Georgetown University

Things may begin to change, however. On June 30, in a ground-breaking move, video streaming company Netflix announced that it was going to move about $100m to financial institutions that serve black communities. Others followed suit to support those lenders. 

BofA committed to deposit $100m in MDIs and $50m in direct equity investments in three such institutions: First Independence Corporation of Detroit, Michigan; Liberty Financial Services in New Orleans, Louisiana; and SCCB Financial Corporation in Columbia, South Carolina. 

At the same time, discussions have started between the US’s largest banks and MDIs on possible partnerships, to provide scale and upgrade the smaller banks’ technology and marketing. Vincent Toye, group head of community lending at San Francisco’s Wells Fargo says that “rather than coming in and announcing we will buy 5% of the equity of the bank … we try to understand the organisation holistically and then work out how we can add value. Our goal is to make an impact where we invest and bring other people and non-profits with us too.” 

Meanwhile, a second issue that prevents black households from bridging the wealth gap is getting attention, according to MDI bankers. Ms Bradley points to the fact that decisions on loans and mortgages are now centralised, rather than taken within branches, where staff have a chance to know customers and understand them better. “Moving to a kind of algorithm-driven, centralised decision-making that takes the personal equation out of the picture — I think that affected black Americans and people of colour considerably,” she says.

A new line of credit

However, in July, building on the momentum sparked by Mr Floyd’s killing, the Office of the Comptroller of the Currency (OCC), the national bank regulator, convened representatives from JPMorgan and Wells Fargo, as well as leaders from business, technology and minority organisations, to remove structural barriers and expand access to credit and capital in low-to-moderate income and preponderant minority neighbourhoods. The initiative, Project Reach (Roundtable for Economic Access and Change), also aims to establish an alternative credit-scoring method that regulators and others would recognise as safe and fair. 

In a public speech on August 28, Brian Brooks, the acting head of the OCC, said: “It turns out that it is almost impossible to build household wealth in the US if you do not own a home. And you cannot buy a home unless you have a credit score, so you can qualify for a mortgage.” He continued: “So when you find out 45 million Americans don’t have a credit score and that that population of people skews more heavily [towards] minorities than the population at large, that’s an example of a structural barrier to wealth building. And we can fix that.”

It turns out that it is almost impossible to build household wealth in the US if you do not own a home. And you cannot buy a home unless you have a credit score, so you can qualify for a mortgage

The standard way a bank evaluates a person’s credit score, which represents that person’s credit risk, is by checking their payments: typically their credit card and mortgage payments. But the trouble with this, experts note, is that if you are someone from a low-income black or Hispanic community, it is quite likely that, rather than owning a home, the household will be renting and is paying cash for goods instead of charging a credit card. That person might represent a perfectly good credit risk, but still not have a credit score. 

“There is a need for more flexibility in credit underwriting to be able to properly serve these communities,” says Brian Argrett, chief executive of Washington-based City First Bank, which is to merge with Los Angeles’s Broadway Federal Bank to create the US’s largest black-led and minority-owned bank, with assets of more than $1bn. The deal, announced in August, is due to complete in the first quarter of 2021. 

Mr Argrett says that the banks will combine “high-potential, high-need markets” — southern California and Washington DC — and emphasises the significance of the deal, which shows how two healthy minority-owned lenders can merge to achieve scale and efficiency.

True representation

Meanwhile, another way to try and bridge the wealth gap affecting black Americans, as well as other minorities, is introducing greater diversity and inclusion within large US banks by increasing minority representation across management levels.

Progress has been made with regards to women and some minority groups, but very little has been done about black Americans. 

Citi, with assets of about $2.2tn at the end of June, was one of the first of the country’s four biggest banks to publish a breakdown of all US employees by ethnicity, across all levels of the bank. In September, it also became the first of the four to break the glass ceiling, naming a woman, Jane Fraser, a Scottish–American and head of the bank’s global consumer division, as its next CEO. Alongside Citi, BofA, JPMorgan and Wells Fargo published data on minority employees too. 

But Keith Corbett, executive vice-president at Washington’s Centre for Responsible Lending, says that although the programmes adopted by various banks are encouraging, “what I see is they are giving black Americans jobs in human resources, corporate affairs, and analytic and analyst jobs, but not in decision-making positions. They do not have black commercial loan officers.”

After Mr Floyd’s killing, the country’s biggest banks announced an array of investments mainly for poor black neighbourhoods. New York-based Morgan Stanley, for instance, announced its participation in a $15bn, four-year plan in low-to-moderate income neighbourhoods, with the National Community Reinvestment Coalition. Pittsburgh-based PNC Financial Services, a large regional bank, pledged $1bn to help end racism and provide economic support to black Americans. The commitments will count in the next assessments of US banks carried out by regulators, under the 1977 Community Reinvestment Act (CRA). 

More broadly, the CRA has recently been overhauled with new rules, written by the head of the OCC — a Trump appointee who has since resigned — and due to take effect this month. However, Democrats in the Lower House have passed a resolution to stop the rules being implemented. And, in a rare divergence among financial regulators, neither the FDIC nor the Federal Reserve Bank have signed onto them, leaving the country’s 5000 banks to be regulated, in this respect, by different standards. 

The future of CRA will, therefore, be another challenge on the horizon for bankers, and one whose outcome will also depend on who will be the next White House resident.


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