Jelena McWilliams, chairwoman of the Federal Deposit Insurance Corporation (FDIC), speaks during a hearing of the Senate Committee on Banking, Housing and Urban Development in Washington, DC, the United States, on Tuesday, August 3, 2021.
Al Drago | Bloomberg | Getty Images
The Federal Deposit Insurance Corp. will be unveiling a new mutual fund this week, backed by corporate giants, providing a way for stakeholders to raise much-needed capital to banks owned and supported by People of Color.
The new Mission-Driven Bank Fund will invest exclusively in banks serving minority, lower-income and rural communities that often suffer from long-term capital shortages, according to CNBC documents.
The project represents the latest government-sponsored effort to support minority-owned banks that have faced oversized impacts on smaller banks in recent decades due to loan failures, mergers and acquisitions of larger competitors, and financial downturns.
“One of the things I heard in the beginning, and especially with black banks, was a lack of capital. Finding good capital to get into the banks was number one, ”FDIC chair Jelena McWilliams told CNBC on Monday.
Microsoft and Truist Financial are so-called anchor investors in the fund, who each spend tens of millions of dollars to launch. The fund, which is also backed by media giant Discovery, has raised around $ 120 million to date.
The concept and design of the Fund also implicitly support a new mindset about the best ways to support minority-owned banks that are community-focused and focus on the importance of long-term “patient” capital.
Longer-term investments – such as equity or debt financing – allow lenders greater flexibility in lending for profit to borrowers, the main money-making lever for consumer and small business banks.
Proponents of minority banks hope that more million dollar corporate deposits or more certificates of deposit will give smaller banks enough time to not only generate profits, but also help offset racial economic inequalities.
McWilliams said her early work on the fund included talking to small bank CEOs about how the federal government could best help them with their mission of promoting home ownership and business creation in colored communities.
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“This fund is designed to leverage the investments of others under the FDIC brand,” she said, “and then allow every dollar to be multiplied exponentially for the benefit of homeowners and small businesses and credit in the communities where it is needed most. “
Founded in the aftermath of the Great Depression in the 1930s, the FDIC is perhaps best known as one of the leading banking regulators in the country, insuring American consumers against sudden deposit losses at member banks. In order to prevent “bank runs” through deposit insurance, the FDIC ensures that the member banks meet a large number of financial stability metrics.
Then-President Donald Trump nominated McWilliams to head the FDIC, and the Senate confirmed her appointment in May 2018.
The FDIC will have no role in managing the fund as it could create legal problems and potential conflicts of interest for banking regulators.
Still, the idea for the fund was first introduced by McWilliams, who said it was inspired during a flight a few years ago. She flipped through her seat-back TV and ended up on ABC’s popular investment show, Shark Tank. Reruns of “Shark Tank” will also air prime-time on CNBC.
“When I saw various investors suggesting subjects to the sharks, I thought, ‘Well, why don’t we have a’ Shark Tank ‘-like fund for minority custodians?'” McWilliams recalled. “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 says: ‘Oh dear sir! How are we supposed to do that?'”
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Years later, the fund is ready to go. Investors are offered a new way to direct capital to two special types of lenders known as Minority Depository Institutions and Community Development Financial Institutions, collectively known as “mission-driven” banks.
The FDIC defines an MDI as any bank it insures in which 51% or more of its voting rights are owned by minorities or the majority of its corporate boards are members of a minority group and the community it serves is predominantly minority groups.
The Treasury Department certifies each MDI and CDFI that must demonstrate that at least 60% of all lending, services, and other activities benefit low-income communities. As of March 2021, the FDIC insured 142 MDIs and 172 CDFIs.
Bankers hoping for an investment from the Mission Driven Fund will pitch pitches to the committee and prospective manager that will determine whether the lender will provide equity, leverage, loss-sharing agreements, or other capital.
“Supporting mission-oriented banks is consistent with Microsoft’s commitment to combating racial injustice and inequality,” said Anita Mehra, Microsoft’s corporate vice president of global treasury and financial services, in prepared notes. “We look forward to seeing the continuing opportunities this will bring for mission-driven banks and the communities they serve.”
“MDIs and CDFIs play a vital role in meeting the needs of minorities and rural neighborhoods, and Truist has a long history of partnering with these organizations. We are expanding that commitment through an innovative approach to capital investment, and we believe it will greatly improve these institutions. “‘Ability to deliver positive outcomes for our communities,” said William H. Rogers Jr., CEO of Truist.
Small community banks usually generate a significant proportion of their available capital through customer deposits. In contrast to equity or debt financing, however, savers’ deposits can be repaid at any time and are considered liabilities on a bank’s balance sheet.
This inability to extend credit can be disastrous if economic conditions turn bad, said Michael Pugh, chairman of the board of Carver Federal Savings Bank, a community bank that has prioritized services to New York City’s black communities since 1948.
During the pandemic, “41 percent of black-owned businesses nationally were closed,” Pugh said Monday. “A lot of these companies went down because, frankly, they simply didn’t have the access to the capital to survive a catastrophic situation.”
People walk past a store that goes out of business along 125th Street in the Harlem neighborhood of New York City on August 7, 2020.
Shannon Stapleton | Reuters
Black communities have been underserved by the US banking sector for decades.
In a 2016 complaint, the Consumer Financial Protection Bureau alleged that BancorpSouth had illegally denied black applicants from the Memphis area certain mortgage loans. The CFPB also alleged that the bank had forced its employees to review applications from people of color faster than those of white applicants and not to provide loan assistance to minority applicants.
Three years later, a review of more than 7 million 30-year mortgages led the University of California at Berkeley to conclude that Black and Latino borrowers were “0.079% and for discrimination, respectively.”
National data in 2020 showed that 75% of white households owned the house they lived in. Only half of Hispanic households could say the same thing, while only 45.3% of black households were resident.
“The reason patient capital is needed is because institutions like Carver – the work we do is very focused on rebuilding through revitalizing communities,” said Pugh. “If you don’t have the equity investment, you don’t have the capital and your lending options will be limited.”
That lending, Pugh said, is critical to a bank’s ability to provide mortgages or finance small businesses that “power our nation’s economic engines.” As both an MDI and a CDFI, Carver reinvests 80 cents of every dollar he receives in deposits back in Harlem, Brooklyn and Queens.
An FDIC poll last year found that 13.8% of black households in America have no bank account at all, compared to 5.4% of the total population.
Lenders argue that these differences reflect the fact that minorities tend to have less cash and lower credit scores. Their critics argue that the disparities represent historical and structural problems that banks have a moral obligation to resolve.
“Banks, if you think about the overarching premise, we take deposits and then lend that money,” Pugh said. “And we should do this responsibly to support the communities we serve.”
Disclosure: CNBC owns the exclusive off-network cable rights to Shark Tank.