Jelena McWilliams, chair of the Federal Deposit Insurance Corporation (FDIC), speaks during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, D.C., U.S., on Tuesday, Aug. 3, 2021.
Getty Images This week, the Federal Deposit Insurance Corp. announced a new fund that is backed by corporations. It will allow stakeholders to channel capital to support banks run by people of color.| Bloomberg | Getty Images
The Federal Deposit Insurance Corp. will unveil this week a new investment fund backed by corporate giants that will offer stakeholders a way to channel much-needed capital to banks owned by and in support of people of color.
CNBC has seen documents that reveal that the Mission-Driven Bank Fund is only going to invest in rural banks, which often face a shortage of capital.
The project represents the latest government-backed effort to support minority-owned banks, which have struggled in recent decades because of failed loans, competitors that are larger as a result of mergers and acquisitions, and financial downturns that have an outsized impact on smaller banks.
In particular, I noticed that there was an acute shortage of capital in the early days of my work with Black banks. It was crucial to find good capital that would allow the bank to function. CNBC spoke with Jelena McCWilliams on Monday, as FDIC Chair.
Microsoft and Truist Financial are so-called anchor investors in the fund, each putting in tens of millions of dollars to help it launch. Discovery media also helped to fund the fund. It has so far raised around $120 million.
Design and conception of the fund implicitly support a new way of thinking about how to best support community-owned banks. This is based on long-term capital.
Longer-term investments — such as equity or debt financing — allow lenders greater flexibility to lend capital to borrowers at a profit, the main moneymaking lever for consumer and small-business banks.
Advocates for minorities bank believe that larger corporate deposits of millions of dollars or more certificates of deposit will allow smaller banks to have enough time to generate profit and to address racial-based economic inequalities.
McWilliams explained that she had conversations with bank CEOs to learn how they could help the federal government in their quest for homeownership and economic growth among minorities.
“This fund is supposed to leverage the investments from others under the brand of the FDIC,” she said, “and then allow every dollar to be multiplied exponentially for the benefit of homeowners and small businesses and credit in the communities where it is needed the most.”
The FDIC was established in 1930 after the Great Depression. It protects American citizens against unexpected deposit losses in its member banks. FDIC is responsible for ensuring that banks in its member countries meet certain financial stability criteria.
McWilliams was appointed by Donald Trump to head the FDIC. The Senate approved her nomination in May 2018.
Because of potential legal issues and conflicts of interest, McWilliams will not be able to manage the fund.
McWilliams said McWilliams first suggested the fund after she saw it on a flight a few decades ago. She eventually tuned in to ABC’s “Shark Tank” investing program, while glancing at her television. CNBC also broadcasts reruns of Shark Tank during primetime.
“As I watched different investors pitch their themes to sharks, my thoughts were, “Well, why not have a Shark Tank-like fund for minority depository institutions?” McWilliams said that he remembered. “As soon as I landed, I called up Brandon [Milhorn], who’s my chief of staff here. Then I told Brandon, “Brandon! I’d like to see a Shark Tank for the minority banks.”
He was like “Oh, dear Lord!” “How are we going do it?”
Years later the fund is ready to launch. The fund will offer investors a way to raise capital for two types of lenders: Minority Depository Institutions (MDIC) and Community Development Financial Institutions (CDFI), collectively called “mission-driven” bank.
A MDI can be defined as a bank that has at least 51% of its voting stock held by individuals of minorities or its majority shareholder is a member of a group of people who are primarily from minority communities.
Each MDI/CDFI must be certified by Treasury Department. This means that they have to show that 60% or more of the total loans, services and activities they provide benefit low-income populations. As of March 2021, the FDIC insured 142 MDIs and 172 CDFIs.
Leaders of banks looking to invest from Mission-Driven will pitch their ideas to the Committee and the forthcoming Manager, who will determine whether or not to lend the lender equity investments, debt financing, or capital.
Anita Mehra from Microsoft, the corporate vice president for global treasury, stated in prepared remarks that “Supporting mission driven banks aligns perfectly to Microsoft’s promises to address racial inequity and injustice.” We look forward to seeing what opportunities it will provide for mission-driven bank and their communities.”
Truist’s history of partnership with CDFIs, MDIs, and CDFIs is proof of their vital role in rural communities and serving minority needs. We’re extending this commitment through an innovative approach to capital investments and we believe this will significantly enhance these institutions’ ability to provide positive outcomes for our communities,” said Truist CEO William H. Rogers Jr.
Small community banks tend to generate a significant percentage of their available capital through customer deposits. Funds can be easily redeemed at any moment by savers and considered liabilities to a bank’s financial statements, but not equity ownership or financing.
When economic conditions turn sour, inability to borrow money can lead to disastrous results, according to Michael Pugh (chief executive at Carver Federal Savings Bank), a community bank which has been serving New York City’s Black communities for over 50 years.
Pugh reported Monday that “41%” of Black-owned companies at the national level were closed during the pandemic. Pugh said that many of the businesses closed because they did not have sufficient capital to withstand a catastrophe.
On August 7, 2020, people walk past a Harlem store closing down.
Shannon Stapleton | Reuters
Black communities have for decades been underserved by the U.S. banking sector.
According to the Consumer Financial Protection Bureau, BancorpSouth had denied Memphis-area Black applicants some mortgage loans in 2016. In addition, the CFPB stated that employees at BancorpSouth were required to approve applications faster from applicants of color than from applicants who are white and to not provide credit assistance for minority applicants.
After examining more than 7,000,000 30-year mortgages, the University of California at Berkeley concluded that Black and Latino homeowners pay 0.079% percentage points higher in interest on home-purchase and refinance loans, respectively.
According to national data, 75% white households own the house in which they live. Hispanic households can say this only half the time, but Black households own just 45.3%.
“The reason that patient capital is needed is because the institutions like Carver — the work that we’re doing, is very much focused on rebuilding by revitalizing communities,” often a yearslong process, Pugh said. Without equity investment your opportunities for lending are limited.
Pugh stated that lending is crucial for banks to be able to provide financing to small business owners and mortgages to them. Carver is both a CDFI and an MDI. It reinvests 80c from every dollar it gets in deposits back into Harlem Brooklyn, Queens, and other areas.
FDIC research last year showed that American Black households had 13.8% less bank accounts than the 5.4% overall.
According to lenders, these disparities are due to the fact that minority households tend have lower credit scores and less cash. The banks are morally bound to solve historical and structural problems, according to their critics.
Pugh stated that banks, when you think of the overall premise, take deposits and lend out money. We should do it responsibly to support our communities.
Disclosure: CNBC holds the exclusive rights off-network to Shark Tank.