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posted on 17 May 2017

Minority-owned Banks And Their Primary Local Market Areas

from the Chicago Fed

-- this post authored by Maude Toussaint-Comeau and Robin Newberger

Minority-owned banks failed at relatively high rates during the financial crisis. More recently, there is evidence of expansion in the sector’s number of branches and extension into new markets, although challenges related to funding and capital remain

The disproportionate impact of the recent financial crisis and housing market shocks on racial and ethnic minority neighborhoods has prompted researchers to revisit economic issues that relate to financial inclusion and the role of minority depository institutions (MDIs) and community development financial institutions (CDFIs), whose missions often include the promotion of financial services and credit in traditionally underserved communities (Reuben, 2010; Phillips, 2010; Rugh and Massey, 2010; and Kashian, McGregory, and McCrank, 2014). Minority-owned community banks were hit particularly hard during the 2008 financial crisis, as evidenced by higher rates of failures and closures relative to nonminority bank peers. Nearly all states with MDI banks saw a net decline in MDIs between 2008 and 2015. Illinois, one of the states in the Seventh Federal Reserve District, lost the highest percentage of MDI banks in the country (eight banks or 47 percent of its MDIs). There were five African American-owned banks in Chicago in 2001. By 2017, however, with the demise of Seaway Bank (acquired by an Indian American [Asian] bank, State Bank of Texas, then sold two months later to Self-Help Federal Credit Union), this leaves Chicago with two blackowned banks, Illinois Service Federal and Urban Partnership (which succeeded ShoreBank), a CDFI.1 These trends have raised questions about the extent to which MDIs can continue to help redress inequality in credit and access to financial services, while remaining viable and sustainable.

In this article, we analyze the experience and performance of MDIs in their primary local service areas in recent periods, including before, during, and after the 2008 financial crisis. We provide a review of the sector, highlighting key policies and initiatives pertaining to and affecting these institutions, and provide a brief review of previous research. We document trends in the sector, including: 1) the characteristics of the locations where MDIs tend to do business; 2) the changing landscape of MDIs in terms of openings, closings, and mergers by ethnic ownership; and 3) the performance of MDIs as measured by selected financial ratios, including loan quality, operating income, and funding sources. We present these trends over time, comparing MDIs with nonminority-owned (non-MDI) community banks.

We compare MDIs with non-MDI community bank peers ($10 billion in assets or less) in similar local service (census tract) areas. By considering small geographical areas, as measured by census tracts, our analysis thus controls to some degree for MDIs and non-MDIs that are located in the same metropolitan areas but may be serving different neighborhoods and customers. This setup also allows us to determine other diferences, which might be associated with the type of local service areas specific to MDIs and their competitors.

[click on image below to continue reading]

Source: http://app.frbcommunications.org/e/er?s=1064 &lid=4628 &elqTrackId=9487beb5435c4953b3d24ccb063de17e &elq=e036578863fb4a1fa6e02d642bedf0b5 &elqaid=11723 &elqat=1

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