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The Battle to Keep America's Black Banks Alive -2-

Rather than funnel capital into existing banks, Mr. Render said he wanted to start a business that would close some of the gaps between Black banks and their bigger competitors, starting with technology. Greenwood is planning to offer mobile-banking apps that will let users access accounts at small Black-owned banks as easily as they could access accounts at big mainstream lenders, taking away an obstacle to opening accounts at small banks.

Mr. Render said he is modeling the idea on the Greenwood neighborhood of Tulsa, Okla., a thriving Black business district that was razed by white mobs in 1921. Mr. Render said he was taken with the idea that Greenwood brought wealth to Tulsa's Black community in part by connecting it to the larger economy. He and Greenwood President Aparicio Giddins said Greenwood will offer accounts with Black-owned banks and mainstream banks, in part to link Black customers with the mainstream, and in part, Mr. Render said, because he is concerned that the 18 remaining Black-owned banks have limited capacity to take on large numbers of new customers.

A Black Banking Boom

The idea of lending specifically to Black Americans began with Reverend William Washington Browne, an ex-slave who started a fraternal organization to support Black enterprises and founded America's first Black-owned bank in Richmond, Va in 1888. By 1900, the Savings Bank of the Grand Fountain United Order of True Reformers had branches in 24 states. Regulators closed the bank 10 years later.

Black-owned banks boomed from 1910 to 1930, said Mehrsa Baradaran, a law professor at the University of California, Irvine, who researches Black banks. Citizens Trust Bank, located in Atlanta, and Industrial Bank, based in Washington, D.C., were two that resulted from this early burst.

In that segregated era, they were often the only banks that would lend to people in Black neighborhoods. For decades, mainstream lenders shut out minority communities through "redlining" -- the now illegal practice of refusing mortgages for people in low-income and Black neighborhoods.

An entrepreneurial spirit born out of exclusion reverberated into the 1960s, Ms. Baradaran said. The Civil Rights era produced another boom of interest in Black banks, from activists and the government. Though Congress in 1968 had just outlawed "redlining," officials remained concerned that discrimination would continue. If mainstream banks wouldn't lend to minorities, the thinking went, then perhaps minority-owned lenders would help bring financial equality.

In 1969, the Treasury Department began depositing money in Black-owned banks to boost their capital so they could lend to communities that mainstream banks continued to shun. The Minority Bank Depository Program still encourages government agencies to deposit funds in minority and women-owned banks. As of 2020 there were 71 minority banks enrolled in the program and the total amount of deposits collected by the banks in fiscal year 2020 was $32.6 million.

In 1989, Congress passed more legislation that tasked the FDIC with providing technical support and advice to minority-owned depository institutions so they could continue to support underserved communities.

The Nixon-era policy of supporting Black-owned banks as a way of addressing lending inequities had a flaw, said Anne Price, the president of advocacy group Insight Center for Community Economic Development. Several dozen little banks couldn't possibly cancel out entrenched discrimination by the country's biggest lenders. Relying on Black-owned banks to solve the problem inadvertently absolved everyone else, she said.

"In a way, there were two markets set up: one for Blacks and another for whites," she said.

Black-owned banks now account for just 0.2% of all banks regulated by the FDIC, according to June 30 data. The last Black-owned bank to go under was City National Bank of New Jersey, which regulators seized in November 2019. Total assets at America's Black-owned banks were $4.5 billion as of June 30, according to the FDIC, down from $4.7 billion in 2005.

The largest Black-led bank -- a planned union of Los Angeles's Broadway Federal Bank and Washington, D.C.'s City First Bank -- will have $1 billion in assets if that merger closes in 2021.

The FDIC's inspector general said in a 2019 report the FDIC achieved its goals by preserving and promoting minority banks and ensuring they remained minority led or owned. An FDIC spokeswoman in an interview said assets controlled by Black-owned banks haven't dipped since 2001 despite the fact there were twice as many of these banks then as in 2019.

At the same time, according to the inspector general's report, the technical support provided by the FDIC didn't seem to help minority banks stay open. The inspector general also cited a study from the Federal Reserve Bank of Chicago showing that Black-owned banks faced bigger challenges, like maintaining enough capital, to stay in business from 2011 to 2017 than other minority-owned banks.

The FDIC is now seeking new ways to help the remaining Black-owned banks stay healthy, a spokesman said. It is starting a fund run by an independent manager will assist companies that want to invest in minority institutions but may not know how. And minority institutions will be able to request support in the form of equity, help with troubled assets, or other investments. "This is by no means a panacea, but it's an important leap forward," he said.

'Just Let It Rot'

The problems of Black-owned institutions accelerated in the aftermath of the 2008-09 crisis, when their numbers contracted by 42% over 12 years -- slightly more than the 38% drop for all banks supervised by the FDIC. In Milwaukee, the Black-owned Legacy Bank found itself burdened with troubled loans that were mostly caused by the economic downturn. Margaret Henningsen, one of the bank's founders, was trying to raise additional capital in 2011 when regulators decided the bank was no longer viable. It was acquired by another Black-owned lender, Seaway Bank & Trust Company. Seaway itself failed in 2017.

"It broke my heart," said Ms. Henningsen, "After watching Seaway take on other troubled banks, it became a troubled bank."

Eighty-one miles south in Chicago, the crisis made life considerably more difficult for another Black-owned bank called Covenant. Its chairman, Mr. Winston, wanted to eradicate poverty and borrowed from a Black-owned bank in 1997 to buy an abandoned mall to house his congregation when mainstream banks wouldn't lend to him. A decade later, he and his parishioners pooled their funds to buy a bank of their own.

It began with optimism. With funding from his personal accounts and his parishioners, Mr. Winston's group acquired the tiny Community Bank of Lawndale, which had a single branch in a predominantly Black neighborhood. He came up with a plan to put a new branch in the mall his church bought -- making it a convenient place for congregants to do business.

Over five years, Covenant extended more than $19 million in loans to a largely Black clientele. Bank employees also went to local churches to teach congregants the basics of finance.

Then the bank got caught in a downward spiral during the 2008-09 crisis as its customers struggled. Covenant would grant borrowers who couldn't pay extensions on their loans. These loans had to be downgraded on the bank's books, forcing the bank to raise more capital.

"The minority community is usually the first laid off," Mr. Winston said. "They can't pay on the loans they have."

Mr. Winston tried to sell additional shares in Covenant, but potential investors balked. He said he approached bigger banks and companies in the area to see if they would deposit money with Covenant, but didn't get any traction. So he put more of his own money in -- more than $2 million in the end -- to keep Covenant afloat.

Regulators shut down Covenant in 2013 and sold its assets to another Black-owned lender. Mr. Winston said he is still angry that some local media coverage blamed him for pushing congregants into a bad investment. He said he felt he was being criticized for trying to fix a system that he believes is stacked against Black borrowers and Black banks alike.

"I got wiped out," he said. "I just got weary. I just couldn't hold it anymore. One of the board members said to me: 'Pastor, don't put in any more money. Just let it rot.'"

Searching for the Middle Class

In many ways, the struggles of Black-owned banks and small, community lenders are one and the same. Thousands of small banks have closed their doors over the last three decades, while the biggest banks have continued to grow.

America's biggest banks spend tens of billions of dollars a year on technology. They offer a full range of financial services -- credit cards, retirement planning, deal-making advice -- that wealthy consumers and big businesses want and need. When those customers leave, tiny banks are left with lots of tiny accounts.

"What really would help us is if potential customers would look at our residential and commercial loan products," said B. Doyle Mitchell Jr., the president and CEO of Black-owned Industrial Bank in Washington, D.C.

Industrial has been in Mr. Mitchell's family for three generations, and was strong enough last year to acquire the closed City National Bank of New Jersey. In June, Industrial got a $5 million grant from Morgan Stanley.

But to thrive, Mr. Mitchell said, Industrial and America's remaining Black-owned banks need something else: more middle-class borrowers. Small accounts carry the same expense as larger accounts, he said.

Small banks make money on the spread between what they pay depositors and what they charge borrowers. For banks to make a profit, the good loans must far outnumber the bad. Black-owned banks that cater to riskier borrowers often find themselves on the wrong side of the equation.

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November 07, 2020 00:14 ET (05:14 GMT)

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