Since 1976, Commonwealth National Bank has been expanding economic opportunities for underserved residents of Mobile, Ala. One of 143 Minority Depository Institutions (MDIs) in the country, Commonwealth makes loans available to business owners and consumers that traditional banks and financial service providers often overlook.
However, like many other banks that serve minority communities, Commonwealth has had its share of challenges. Minority Depository Institutions face unique obstacles. For example, they almost invariably take a harder hit in economic recessions. When the economy turns south, minorities, who tend to hold more tenuous positions lower down on the pay scale, lose their jobs first and are often the last to be rehired. As such, lenders with more exposure in the Black community are often the first to be stressed — their loans are the first to go into default, their depositors the first to withdraw their savings.
In essence, each time the economy falters, a disproportionate number of Minority Depository Institutions find themselves in trouble through no fault of their own.
Commonwealth understands this reality all too well. In 2015, federal regulators classified the bank as a “troubled institution” and issued a consent order against it. As a result, when the Treasury Department launched the Emergency Capital Investment Program in 2021 to provide support for low- and moderate-income community financial institutions, regulators advised Commonwealth not to apply. Though Commonwealth had been informed that a recommendation had been made to close the consent order, it could take several months for such a recommendation to be approved and go into effect. In the interim, Commonwealth was still classified as “troubled,” so the bank was shut out of the program, and Mobile, Ala., residents missed out on resources that could have spurred growth and revitalization in their community.
The Economic Capital Investment Program was created to provide critical growth capital for smaller institutions like Commonwealth; yet those that were deemed “troubled” could not benefit because of challenges that larger, more capitalized banks are less likely to face. In fact, only 57 out of 143 Minority Depository Institutions received funding through the program.
For decades, often well-meaning regulators have made a habit of shutting down a disproportionate share of Minority Depository Institutions during economic downturns. Between 2008 and 2021, the number of MDIs in America declined by 33 percent, even as minorities grew as a percentage of the population, and many larger firms dominated by white leadership thrived. Indeed, during the initial COVID crisis, even junk bonds of highly leveraged companies obtained government guarantees. And meanwhile, the number of Black Minority Depository Institutions declined between 2008 and 2021 by a whopping 48 percent — down from 31 institutions to merely 16. It’s not that regulators are explicitly targeting minority banks. Rather, they’re applying standards that disadvantage them in a backhanded way.
When Minority Depository Institutions flounder, regulators often argue that they took on untenable risk, they extended loans backed by (temporarily) depreciated assets, and their business practices simply aren’t up to snuff. As a result, the government has repeatedly forced waves of them out of businesses — there were 215 in operation before the Great Recession, but there are only 143 today. In many cases, a closed Minority Depository Institution’s assets are then sold for a pittance to more established larger financial companies that often make a windfall when the economy recovers. In the last tragic act, the communities those institutions served are left without banking services altogether, and residents are forced to patronize lenders that have less interest in catering to them.
Residents of better-off neighborhoods have no perspective on what’s happening. They’ve rarely dealt with banks such as Capitol City Bank, Gateway Bank, City National Bank of New Jersey and Highland Community Bank — all of which have been forced out of business. But in the Black community, these lenders have long been sources of pride and opportunity. In some cases, these institutions emerged when traditional banks refused to serve minority neighborhoods. But in others, banks that served white communities simply proved incapable of evaluating loan applications from minority borrowers. So, minority communities did the obvious thing — during periods of economic growth, they pooled their own deposits, set up their own banks and financed minority businesses, families and others on their own.
To be clear, it’s not that the federal government has done nothing to help Minority Depository Institutions through the years. Washington has worked for decades to compel the financial industry to spread the wealth to poorer neighborhoods in good times. Indeed, the Community Reinvestment Act forced big banks to serve minority neighborhoods more effectively. Empowerment Zones and other tools have been added to incentivize outside investment. But this particular problem — the stacked disadvantage Minority Depository Institutions have when the economy turns south— needs fixing.
As the economy emerges from the pandemic, we should address this underappreciated problem ahead of the next down cycle. One potential solution, modeled off the Strategic Petroleum Reserve President Biden just tapped to protect consumers against rising gas prices, is to establish a reserve fund for Minority Depository Institutions to be deployed during economic downturns. Whatever regulators choose to do, the goal needs to be ensuring that the next wave of economic destruction does not unfairly disadvantage Black and other minority communities.
As the economy recovers, the financial community needs to face a moment of reckoning. For too long, the incumbent regulatory regime has failed to consider how seemingly innocuous decisions about a lender’s safety and security may have a disproportionate effect on certain communities. To set things right, we need to account for the injustices enmeshed in the status quo.
For generations past, Minority Depository Institutions have been launching pads for prosperity in underserved neighborhoods. They should be — they need to be — there in the future as well.
Gene Ludwig is the chair of the Ludwig Institute for Shared Economic Prosperity and the author of “The Vanishing American Dream.” He is the former comptroller of the Currency. Follow him on LinkedIn and Twitter: @geneludwig.
Nicole A. Elam, Esq. is the president and CEO of the National Bankers Association, an organization dedicated to capitalizing, modernizing and strengthening minority-owned and -operated banks. Follow her on LinkedIn.