The wealth gap between whites and blacks in America is both massive and persistent.

At the same time, the nation’s black-owned banking sector has been shrinking faster than the rest of the banking industry.

The connection between these two trends is the subject of a new book by University of Georgia law professor Mehrsa Baradaran. The book, "The Color of Money: Black Banks and the Racial Wealth Gap," details the history of African-American-owned banks. Baradaran argues the sector was never going to be able to deliver what its boosters hoped it could achieve: the end of black poverty.

“The very circumstances that created the need for these banks — discrimination and segregation — permanently limited their effectiveness and would ultimately cause their demise,” she writes.

Black banking had a golden era between roughly 1910 and the 1930s, when many African-Americans left the South and moved to northern cities. But discriminatory mortgage lending policies — which were enshrined by President Franklin D. Roosevelt and resulted in the redlining of black neighborhoods — led to the industry’s decline in the 1940s, 1950s and 1960s.

In the late 1960s, President Richard Nixon promoted the idea that black capitalism was the key to improving economic fortunes, and he created a system of government support for black-owned banks that has endured.

But that system has not had the impact that its supporters envisioned. Survey data released by the Federal Reserve this week found that the median net worth of white families outstrips African-American families by more than nine times, while another recent study found that whites have 68 times more wealth.

In an interview, Baradaran spoke about how the federal government’s efforts could be improved, how black banks are different from other ethnic banks, and why she still has hope that the racial wealth gap can be ameliorated.

The interview has been edited for length and clarity.

What prompted you to write a history of black banks?

MEHRSA BARADARAN: I actually just wanted to read the history of black banks. I’ve done some research into the credit union history, and the thrifts, and postal banking. I was sort of digging around in these files, and I saw all these mentions to black banks.

So I asked my librarian: Will you just get me a book about black banks? And as it turned out, no one had written their history. The last real book on black banking was like in 1935, and it was this academic treatise. I thought studying black banks could illuminate the ways that blacks have dealt with the economy and their struggle to gain wealth.

You make the somewhat surprising point that Frederick Douglass, Abraham Lincoln, W.E.B. DuBois, Marcus Garvey, Martin Luther King, Malcolm X, the Black Panthers, Richard Nixon, Alan Greenspan, Ronald Reagan, Bill Clinton and Barack Obama were all champions of black banking. Why do you think that this idea has had such appeal across the political spectrum?

I think because it seems to make sense. Certain of those people, like Malcolm X and Marcus Garvey, have different ideas. They wanted to actually be a different society. But then there’s others who are like, "If you’re going to be in a segregated black community, you should have your own banks." So a lot of this was the same idea that goes with microcredit as a solution to poverty.

You’re pessimistic about the potential of black banks to really have a meaningful impact on the racial wealth gap.

I wouldn’t say I’m pessimistic. I just think that if we’re going to rely on them to do this, then they need more structural support. No one else is really focused on it. I want the industry to be supported. I just think that we need to understand what their limitations are, and how much can be done without a structure that supports these banks.

What are the kinds of structural supports that would be necessary?

They need help with capital. To be a black-owned bank, 51% of your capital has to be from black investors. And that really restrains them, because they can’t raise capital in the typical ways, because there’s this racial component. So maybe give them more flexibility in that.

They constantly get lower [Community Reinvestment Act] ratings than other banks because one of the measurements of the CRA is on lending criteria, that they’re not lending enough. Part of the reason they can’t lend enough is that they aren’t as well capitalized as these other banks. They don’t have the deposit base that is really useful. So maybe encouraging lots of people to deposit in black banks instead of just blacks, and encouraging others to support them with capital, so it’s not just a thing that the black community does.

We really need to have this conversation about, if we’re going to support black banks, let’s make sure that the support that we’re giving them is actually outcome-driven. And so far it seems to me to just be sort of process-oriented. All of the agencies — they have these offices that have been focusing on minority banks. They have technical assistance. And really, I don’t think the banks need training. I just think structurally there’s some issues there that need to be addressed.

Your first book — "How the Other Half Banks" — argues that deregulation of the banking industry starting in the 1970s led to consolidation and the growth of payday lending. Have the same industrywide forces made it harder for black banks to compete over that same period of time?

Yeah, absolutely. It’s not profitable to bank to poor people. And so insofar as a lot of these black banks are serving poor black communities, it’s even harder than ever to make a profit.

And to add insult to injury, a lot of the worst subprime lenders came after these mortgage-deprived black communities. So blacks lost 53% of their wealth after the financial crisis. There’s this adage that I come back to in the book that says, “When Wall Street catches a cold, Harlem gets the flu.” And you see this — when there is a dip, the black communities just get hit harder, because they have less wealth, they have less of a buffer.

I live in Los Angeles, and we have here a thriving Korean-American banking community, a thriving Chinese-American banking community. Is it unfair to look at black banks and ask why aren’t they achieving the same kind of success?

I compare this to Bank of America. Bank of America started as Bank of Italy in California. And when Italians became able to get mortgages after the New Deal, Bank of Italy was able to become Bank of America.

So as the people have been able to grow wealth and not be segregated, their banks have done likewise. As far as segregation goes, no one has been segregated quite like blacks.

And a lot of other groups also came with capital. Not all, but some. And then Asians — their banking system is not this response to segregation. Theirs is more, "We feel comfortable with people that speak our language, and so we’re going to bank in Chinatown."

Have you gotten any feedback on the book from executives at black banks?

I haven’t gotten formal feedback. I’ve spoken to some. And I’m very clear that I’m pro-black- bank. I just think that they need support.

Congress had a hearing on black banks in 2007, so before the crisis. And many of them said this — that their capital structure didn’t work. So I’m using their words.

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Kevin Wack

Kevin Wack

Kevin Wack is a California-based reporter for American Banker who covers the U.S. consumer finance industry.