The pandemic was a fresh reminder of the need for action to change the many ways in which our systems for wealth creation continue to exclude communities of color. As is often the case, the economic hardship brought on by the pandemic disproportionately burdened communities of color, even if the unprecedented relief packages prevented many from experiencing the worst possible economic effects. Moreover, those already largely cut off from the financial products and services that facilitate economic prosperity were once again disadvantaged.
What many people may not fully appreciate is that financial regulators, who can promote access to lending, capital, and other financial services, have an important role to play — indeed, often an affirmative obligation to act — in addressing racial economic inequality. That inequality has become entrenched in our financial and economic systems through centuries of brutality and discrimination. Solving the problem will therefore require many different strategies. Among them are a number of important actions that financial regulators can take in the near term.
One basic but critically important step is for the financial regulatory agencies to ensure diversity in their own leadership and staff and to encourage diversity at the financial institutions they regulate. Congress contemplated this in the Dodd-Frank Act, which created the Office of Women and Minority Inclusion at the agencies, but over a decade later, people of color continue to be grossly underrepresented. At the Securities and Exchange Commission, only a handful of political appointees have been Black, and as of 2021, only 7.1% of senior staff were Black. The banking agencies are improving, but they have much more work to do — Black economists at the Federal Reserve Board as well as throughout the Federal Reserve System are significantly underrepresented, and 80% of the executive managers at the FDIC are white. An abysmal lack of diversity also permeates the financial industry, especially in more senior and executive positions.
Clearly, without diversity, regulators and the institutions they oversee will not adopt priorities and policies that reflect the perspectives of all the people they are supposed to serve. The financial regulatory agencies must lead by example by ensuring diversity at the leadership and staff levels and issuing guidance that promotes diversity in the industry. Effective regulations for combating discrimination at financial services firms must also be in place. Furthermore, the banking agencies must use their supervisory authority to assess whether anti-discrimination laws are being followed, and they must take action when those laws are flouted.
Financial regulators can also expand disclosure by financial firms and public companies to increase public awareness and accountability. Indeed, the SEC’s primary regulatory tool is the requirement that companies disclose material information to investors. Disclosure of diversity data, from board composition to lending and procurement practices, is undoubtedly material to investors who seek to maximize the returns on their investments. The fact that companies that do better on diversity outperform their less-diverse peers financially provides powerful evidence that such information would be material to a reasonable investor.
Similarly, banking agencies can use disclosure to combat racial economic inequality by reporting on the availability of lending, investment and other banking services in economically marginalized communities of color. The Fed in particular should also be disclosing more metrics more often regarding its updated “broad and inclusive” view of full employment and what it sees as the impact of that goal on the U.S. economy. In addition, to address egregious “banking while Black” abuses that can make simple acts like cashing a check a crucible for Black Americans, banking agencies should put emphasis in their examinations not just on what products and services are being offered to low-income and or low-wealth communities and in what quantity but also on how they are being offered. And there should be meaningful consequences when abuses are identified.
The financial regulatory agencies also have tools to more directly address underserved communities that should also address racial economic inequality, since underserved communities are disproportionately communities of color. The most significant one is the authority provided by the Community Reinvestment Act, which requires the banking agencies to ensure that banks are serving the needs of low- to moderate-income members of the communities in which they do business. This is critical in light of the unique role of banks in providing credit, capital and financial services to individuals and small businesses striving to build wealth and prosperity.
While the banking agencies’ rules implementing the CRA have had some success in ensuring broader access to credit, it clearly isn’t doing enough. For example, the rate of homeownership among black Americans is no greater now than it was at the time the law was enacted. The rules implementing the CRA must be modernized to more effectively achieve the meaningful outcomes envisioned by the statute.
Moreover, the banking agencies must effectively use their supervisory and enforcement authority to ensure compliance with the CRA. This includes comprehensively assessing whether banking products and services are being offered in ways that exacerbate economic inequality by underserving low-income or low-wealth communities and extracting wealth or that mitigate inequality by helping to build wealth. Additionally, beyond the CRA, whether through guidance, the supervisory process, or other means, the banking agencies should encourage the use of alternative data for determining creditworthiness that can mitigate some of the known biases embedded in current credit scoring models and expand the provision of credit to those that don’t have a robust credit history.
The SEC, for its part, can also take actions beyond mandatory disclosure to combat racial economic inequality. For example, the training and licensing exams for brokers and advisors should include a strong focus on the need to serve minority investors more inclusively, the realities of the racial wealth divide, and the financial practices that can help meet this challenge.
The persistence of racial economic inequality, which leads to disproportionate suffering for minorities, is an unjustifiable moral blight, born of centuries of racial bigotry. It hurts our entire economy, so we all have a stake in solving the problem. The financial regulatory agencies must play a key role, and every member of the public can engage with those agencies and support their efforts as they craft rules and policies designed to promote racial economic equality.
