Can multimillion-dollar pledge to Black banks help close wealth gap?
A New York community development financial institution has raised $50 million for a fund aimed at supporting Black-owned banks and steering more capital into minority communities.
The Local Initiatives Support Corp. said it plans to make deposits in Black-owned banks and provide financing to minority businesses later this year with the money raised in its Black Economic Development Fund. The big-box chain Costco recently committed $25 million to the fund, following a $25 million pledge by Netflix that seeded the initiative. LISC said it plans to close its first $100 million this fall.
LISC launched the fund this summer as a way for private companies to help close the racial wealth gap. The CDFI said it already has identified $30 million of potential deposits it could make at specific Black-run banks or loans it could directly extend to certain businesses and projects.
George Ashton, its managing director of strategic investments, said the funds deposited at Black-owned banks will have direct and indirect impacts on the communities they serve. Not only will the money allow those banks to make more loans within their neighborhoods, but it will also enable them to offer financial education and other resources more widely, he said.
“Those banks are often key players in the community,” he said. “Our goal is to infuse capital into the banks with deposits but also participate with them directly in transactions that benefit the community.”
Widespread protests after the death of George Floyd and the pandemic’s outsize effect on minorities have motivated private-sector companies to act. Bank of America, PNC Financial Services Group, U.S. Bancorp and Huntington Bancshares have made multipronged, large-dollar commitments to address racial inequities.
CDFIs and minority financial institutions will play a key role in connecting those big-dollar pledges with the people, businesses and community development projects that need them the most.
Increasing access to mainstream financial services is critical to closing the wealth gap, many experts say. Forty-seven percent of U.S. households are unbanked or underbanked, compared with 20% of white ones, according to a McKinsey & Co. study that drew on data collected by the Federal Deposit Insurance Corp. in 2017. Increased access to basic banking services could save Black Americans up to $40,000 in check-cashing and other fees over the course of their lives.
Yet the number of minority depository institutions has declined to 143 as of the second quarter from 197 a decade ago, and Black-owned banks have particularly suffered since the financial crisis. Minority depository institutions collectively held $280 billion in assets as of June 30.
Citigroup agreed to purchase up to $50 million in Paycheck Protection Program loans from minority-owned banks, allowing those smaller institutions to free up capital and also keep the loan fees. Comerica in Dallas said it will deposit $10 million with minority-run banks, and PayPal deposited $50 million in the $155 million-asset Optus Bank, a minority-owned institution in Columba, S.C.
Many large banks had also already zeroed in on CDFIs as critical to getting emergency aid to small businesses even before the civil unrest precipitated by Floyd’s death. Minneapolis-based U.S. Bancorp, for instance, backed Black-led CDFIs early into the pandemic and has said those partnerships will be key to carrying out its $116 million pledge to address systemic racism.
It will be a tall order, to be certain, but industry officials and outside experts say that closing the wealth gap between Black and white families will benefit society more broadly. One study estimated last year that it could add $1.5 trillion to the U.S. economy.
Ashton said he expects LISC to raise the remaining $50 million for the fund with large pledges like those made by Netflix and Costco. He said similar commitments are “waiting in the wings.”
“There’s a social-consciousness awakening that this is a problem and its sources are systemic racism,” he said. “Exclusion of these communities from the financial system has really created problems that are bad for our society.”