Federal Deposit Insurance Corporation (FDIC) President Jelena McWilliams speaks during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, DC, United States, Tuesday, August 3, 2021.
Al Drago | Bloomberg | Getty Images
The Federal Deposit Insurance Corp. This week will unveil a new investment fund backed by giant companies that will provide a way for stakeholders to channel much-needed capital to banks owned by and for people of color.
The new mission-focused bank fund will invest exclusively in banks that serve minority, low-income and rural communities that often suffer from a lack of long-term capital, according to documents viewed by CNBC.
The project represents the latest government-backed effort to support minority-owned banks, which have struggled in recent decades due to failed loans, larger competitors from mergers and acquisitions and financial downturns that have a disproportionate impact on small banks. .
“One of the things I heard at the start, and especially for black banks, was a lack of capital. Finding good capital to come into banks was the No.1 thing,” CNBC told CNBC on Monday. FDIC President Jelena McWilliams.
Microsoft and Truist Financial are what are called anchor investors in the fund, each putting in tens of millions of dollars to help it get started. The fund, also backed by media giant Discovery, has raised around $ 120 million to date.
The fund’s design and design also implicitly endorses a new school of thought on how best to support minority-owned and community-based banks, which focus on the importance of long-term “patient” capital.
Longer-term investments – such as equity or debt financing – allow lenders more flexibility to lend capital to borrowers at a profit, the main lever of income for retail and small business banks.
Supporters of minority banks hope that more business deposits of $ 1 million or more certificates of deposit will give small banks enough time to not only generate profits, but also to help rectify inequalities. based on race.
McWilliams said his early work on the fund included conversations with CEOs of small banks about how the federal government could best help them in their mission to boost homeownership and business creation among the communities of color.
“This fund is supposed to leverage other people’s investments under the FDIC brand,” she said, “and then allow every dollar to grow exponentially for the benefit of homeowners and small businesses and credit. in communities where more is needed. “
Founded in the aftermath of the Great Depression of the 1930s, the FDIC is perhaps best known as one of the nation’s leading banking regulators, and insures American consumers against sudden losses of deposits at member banks. In order to avoid “bank runs” through deposit insurance, the FDIC ensures that member banks meet a variety of financial stability measures.
Then-President Donald Trump appointed McWilliams to head the FDIC, and the Senate confirmed his appointment in May 2018.
The FDIC will have no role in the management of the fund as this could pose legal problems and potential conflicts of interest for the banking regulator.
Still, the idea for the fund was first floated by McWilliams, who said he was inspired a few years ago during a robbery. Flicking through her television from the back of her seat, she finally listened to ABC’s popular investment show “Shark Tank”. Reruns of “Shark Tank” also air in prime time on CNBC.
“Seeing different investors pitching their themes to the sharks, I was like, ‘Well, why don’t we have a’ Shark Tank ‘type fund for minority depositories?’” Recalls McWilliams. “As soon as I landed I called Brandon [Milhorn], who is my chief of staff here. And I said, ‘Brandon, I want us to have a’ Shark Tank ‘for minority banks.’ “
“And he said to me, ‘Oh my God! How are we going to do this?'”
Years later, the fund is ready to go. Investors will have a new way of channeling capital to two special categories of lenders called minority depositories and community development financial institutions, collectively known as “mission-driven” banks.
The FDIC defines an MDI as any bank it insures for which 51% or more of its voting shares are owned by persons belonging to minorities, or a majority of its board of directors are members of a group. minority and the community it serves is made up primarily of minority groups.
The Treasury Department certifies each MDI and CDFI, which must show that at least 60% of their total loans, services and other activities benefit low-income communities. In March 2021, the FDIC insured 142 MDI and 172 CDFI.
Bank executives hoping for an investment from the Mission-Driven fund will present arguments to the committee and the future director, who will decide whether to provide the lender with equity investment, debt financing, loss-sharing arrangements, or other capital.
“Supporting mission-driven banks aligns perfectly with Microsoft’s commitments to tackle injustice and racial inequality,” said Anita Mehra, vice president of treasury and global financial services at Microsoft, in comments prepared remarks. “We look forward to seeing the continued opportunities this will help provide mission-oriented banks and the communities they serve.”
“MDIs and CDFIs play a crucial role in serving the needs of minority and rural neighborhoods, and Truist has an established history of partnering with these organizations. We are extending this commitment through an innovative approach to capital investments and we believe this will significantly improve these institutions. ‘ability to deliver positive outcomes for our communities,’ said Truist CEO William H. Rogers Jr.
Small community banks tend to generate a large percentage of their available capital from customer deposits. But unlike equity investment or debt financing, deposits can be redeemed by savers at any time and are considered liabilities on a bank’s balance sheet.
This inability to make loans can have dire consequences when economic conditions deteriorate, said Michael Pugh, managing director of Carver Federal Savings Bank, a community bank that has prioritized serving black communities in New York City since 1948.
During the pandemic, “41% of black-owned businesses nationwide have closed,” Pugh said on Monday. “A lot of these companies went bankrupt because, frankly, they just didn’t have access to the capital to survive a catastrophic situation.”
People walk past a bankrupt store along 125th Street in the Harlem neighborhood of New York City on August 7, 2020.
Shannon Stapleton | Reuters
For decades, black communities have been underserved by the US banking industry.
In a 2016 complaint, the Consumer Financial Protection Bureau alleged that BancorpSouth illegally denied black applicants in the Memphis area certain mortgages. The CFPB also claimed that the bank is forcing its employees to review applications from people of color faster than white applicants and not provide minority applicants with credit assistance.
Three years later, a review of over 7 million 30-year mortgages led the University of California, Berkeley to conclude that black and Latino borrowers pay “0.079% and 0.036% more percentage points in interest. for buying a home and refinancing mortgages, respectively. , because of discrimination. “
National data showed in 2020 that 75% of white households owned the house they lived in. Only half of Hispanic households could say the same, while only 45.3% of black households owned their homes.
“The reason patient capital is needed is that institutions like Carver – the work we do, are very focused on rebuilding by revitalizing communities,” Pugh said oftentimes. “If you don’t have the equity investment then you don’t have the capital and your lending opportunities become limited.”
This loan, Pugh said, is critical to a bank’s ability to extend mortgages or provide financing to small businesses that “power the economic engines of our country.” As MDI and CDFI, Carver reinvests 80 cents of every dollar he receives in deposits in Harlem, Brooklyn and Queens.
An FDIC survey last year found that 13.8% of black households in America do not have a bank account at all, compared to 5.4% of the general population.
Lenders argue that these differences reflect the fact that minorities tend to have less cash on hand and lower credit scores. Their critics argue that the disparities represent historical and structural problems that banks have a moral obligation to help resolve.
“Banks, if you kind of think about the whole premise, we get deposits and then we lend that money,” Pugh said. “And we should be doing it responsibly to help support the communities we serve.”
Disclosure: CNBC owns the exclusive rights to the off-grid cable of “Shark Tank”.