Big banks and regulators should do more to close the racial wealth gap

CEOs of America's largest retail banks are testifying before Congress this week. As lawmakers turn their eyes on the banking industry, minority banks and their partnerships with the largest U.S. banks can shed light on the industry's efforts to eliminate racial wealth disparities and the growth that these partnerships can drive. To close the racial wealth gap, banks should deepen partnerships with minority-led banks, and policymakers should eliminate regulatory barriers that prevent these banks from reaching their full potential.

Much of the work of providing access to bank accounts, home and business loans, and wealth-building opportunities for Black, Brown and Indigenous communities has historically fallen on the shoulders of under-resourced community lenders. Minority depository institutions and community development financial institutions have been on the front lines working to eliminate barriers to building wealth, credit and economic resilience for minority communities. MDI branches, which are often in census tracts with high minority populations, serve as critical hubs of financial opportunity in these communities.

As the nation emerges from the COVID-19 pandemic, minority businesses and low- to moderate-income consumers are trying to emerge as well. Minority banks remain at the forefront of efforts to rebuild communities and close the racial wealth gap. This time, larger banks are committing to providing MDIs with support. Banks can fill gaps in funding, scale, staffing and technology that challenge these institutions.

MDIs and CDFIs are essential to the economies of underserved minority communities, but they are often underfunded and understaffed. In the last few years, the largest banks have committed more than $500 million in equity investments, grants and other support to MDIs. These efforts have included assisting in building new customer-facing technology, providing operational and technical support and bringing minority banks into lines of business whose scale they wouldn't normally be able to achieve. But despite how crucial these investments are, more is needed for MDIs to grow.

There are more ways that large banks can provide support. MDIs play a critical role in minority communities, and larger banks have the tools to support financial resilience and help close the racial wealth gap. In addition to capital, larger banks can provide business opportunities, true partnerships and extensive technological support.

Both large banks and MDIs benefit when large banks embed support for MDIs into their businesses. Investing in MDIs' resilience by engaging them in business opportunities is a critical way to increase MDIs' access to capital markets and allow them to better meet the credit needs of low- and moderate-income communities. For example, large banks should work with MDIs on loan syndication opportunities that allow the smaller institutions to participate in activities that benefit communities inside and outside their areas of operation. They can also collaborate with minority-owned banks to underwrite bonds and support minority banks' access to municipal financing deals.

These opportunities have unfortunately been out of reach for most MDIs due to past capital constraints. We also believe regulators should encourage and incentivize collaboration across the financial sector, to drive impact in traditionally hard-hit communities. Such regulatory incentives could include the MDI/CDFI investment tax credit, incentivizing loan participations or syndications through the Community Reinvestment Act, Treasury's Emergency Capital Investment Program and CDFI credit.

Partnerships are a driving force that could result in significantly more lending to consumers of color and minority-owned businesses. Investing in MDIs through partnerships allows for not just momentary survival but true prosperity for these institutions in the long run.

Large-bank partnerships with minority-owned and minority-operated banks are embracing creative solutions to channel funding to minority-owned small businesses, creating training and mentorship programs and investing in a pipeline of talent through scholarships for historically Black colleges and universities.

These partnerships cement the connections between mission-driven MDIs and their larger cousins, and enable new business opportunities for minority banks through greater scale.

Minority-led banks also need technological upgrades. Without efficient technological infrastructure, minority-owned and -operated banks have no way to keep up with fintech, mobile banking and other technological advancements.

Large banks are supporting minority-owned and -operated banks' technological investments by infusing capital that funds technology upgrades, providing staff training and offering technical assistance from their own staff.

The necessary tech upgrades for MDIs and CDFIs are costly, and large banks can help to fund them by providing grants to help them transition away from legacy systems and technologies or by creating endowed fellowships, internships or training programs geared toward technology skill sets.

In addition to large banks' support, MDIs and CDFIs need the support of policymakers. Policymakers can also step up to enable MDIs' and CDFIs' success and break down regulatory barriers that leave them underequipped.

MDIs need more capital. These banks can't empower the households and businesses in their communities without fortifying their balance sheets. Unfortunately, MDIs generally lack access to capital markets and large pools of high-net-worth investors, so they are limited in their opportunity to achieve scale and are more vulnerable to loan losses. Treasury's Emergency Capital Investment Program is a step in the right direction, but many MDIs were unable to access it due to regulatory challenges — including bank examination standards that historically failed to consider the unique business models of mission-driven banks like MDIs and CDFIs. The tax structure of some MDIs and CDFIs can also put emergency capital out of their reach by raising supervisory red flags. The Treasury Department's CDFI Fund should also be replenished to support these institutions further.

The Community Reinvestment Act is also critical to ensuring banks provide credit access to minority communities and while the Federal Reserve's current proposal is far from perfect, it helpfully acknowledges that investments in MDIs are part of the ecosystem of support for these institutions. As regulators consider a new proposal for CRA rules, they should ensure that they keep that core mission at the forefront.

After a century of fighting against racism and inequity, minority-owned and -operated banks are beginning to get the support they need and deserve. And while the largest banks are committing their human and financial resources to the strengthening and survival of MDIs, a universal commitment across the banking industry is necessary to achieve our joint goal of closing the racial wealth gap. On Capitol Hill, we hope policymakers keep these things in mind.