The 2013 Interagency Minority Depository Institution and CDFI Bank Conference
Opening Keynote Address
Sarah Bloom Raskin, Governor, Federal Reserve
Thank you, Chairman Gruenberg, for that generous introduction.
I am pleased to have this opportunity to speak at the 2013 Interagency Minority Depository Institutions National Conference. I’d like to begin by thanking the Interagency working group, consisting of staff from the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency for their hard work in coordinating this event and developing the theme of this conference, “Strategies for Success through Collaboration.” I believe that they have put together a very exciting agenda and I look forward to hearing the unfolding of a dialogue on how minority depository institutions and government institutions can collaborate in helping small businesses to grow and support more vibrant and prosperous communities.
In 1989, Congress took an important step when it enacted the Financial Institutions Recovery, Reform, and Enforcement Act 1989 (FIRREA). Among other things, FIRREA fosters collaboration between minority depository institutions (MDIs) and the federal banking regulators.2 In response to this statutory requirement to promote ownership of minority depository institutions and support the viability of existing ones, the agencies began to convene the executive officers of MDIs together with their banking regulators to share perspectives on the particular challenges facing MDIs and to consider ways in which we can address those challenges together. Those gatherings became annual and then biennial conferences and this is the sixth such conference since they began in 2005. I should note that while the Federal Reserve was not originally subject to the MDI provisions of FIRREA, we nevertheless participated in these conferences and other interagency events because we supported the aims of FIRREA.
As a matter of fact, I would suggest that our support over the years demonstrates that even if it weren’t for the requirements of FIRREA, the work of minority depository institutions is worthy of focus because of your contribution to the viability of local economies and your commitment to underbanked customers.
In my brief remarks this morning, I will touch on a few of the challenges currently facing MDIs and their customers. I will also discuss how the Federal Reserve may be able to help minority depository institutions meet these challenges.
Many of the communities across America face a constellation of economic challenges from the recent financial crisis. According to a 2011 FDIC survey, many minority groups, including African-Americans, Latinos, and Native Americans, continue to represent the highest concentration of unbanked and underbanked households.3 The survey’s finding suggests that members of many of the communities your institutions serve may not be fully benefiting from the financial access and inclusion that traditionally have been critical to household and community wealth building. Indeed, home loan data indicate that from 2010 to 2011, home purchase lending fell at about twice the rate in areas with higher minority concentrations than in other neighborhoods.4
What is occurring that is heightening the challenges now found in many communities across the country? I would suggest that some of these challenges are heightened by trends in underwriting. For example, many banks have transitioned from relationship-based lending models to credit scoring models. While this method of lending sometimes is believed to be more cost-effective and helps ensure that lending is nondiscriminatory, it often makes it more difficult for some borrowers to qualify for credit. In some cases, reliance on automated credit scoring models may impede a lender’s ability to balance credit scores with information gleaned from other banking relationships, including information observed through checking and savings account activity, such as the absence or presence of overdrafts, savings tendencies, and spending patterns. Other sources of information about an individual’s qualifications may also be missed, such as rent and utility payment history and experiences with alternative sources of credit such as nontraditional lenders.5
Another emerging banking trend threatens the mere establishment of checking and savings accounts for lower-income minority communities. Specifically, branches located in low-to-moderate income communities have begun to disappear at an increasing rate,6 worsening the unfavorable banking conditions in lower-income communities.
In addition, high-priced title loan and check-cashing facilities have replaced branches in many lower-income communities. Such facilities can be prohibitively expensive, particularly for low- to moderate-income individuals and families who can least afford these services. Staff at the Federal Reserve has found that the practice of borrowing from banks or other lenders beyond their service area is associated with a higher likelihood of default.7 The combination of the increasing geographical dispersion of banking services outside of low-income communities and the increasing proximity of costly alternative financial services within these communities is likely to only compound the financial vulnerability of lower-income minority communities.
And this is where the comparative advantage of MDIs comes into play to counter the adverse effects of changes in the financial industry that may disproportionately affect minority and lower-income consumers. With close knowledge of your local markets and your ability to establish banking relationships with the most economically vulnerable, your banks provide opportunities that may not otherwise exist.
With your business focus on serving the under-banked, the recent recession has been a period of tremendous challenge. As your customers have suffered financially, so too have many of your institutions. Consequently, and just like many other community banking organizations, it is not surprising that some MDIs may have struggled with diminished profitability and weakened asset quality. Some institutions may need additional capital, which, for many, has been difficult to obtain. But I suspect that you continue to serve these communities because you understand that access to traditional banking services is integral to neighborhood revitalization and economic improvement and because you worry that if you don’t serve your community, no one else will.
Federal Reserve MDI Initiatives
As bankers running MDIs, I understand that you may feel torn between serving communities that need banks that provide affordable credit, savings vehicles, and good financial advice, and not being able to provide those services. And as regulators, we need to make sure that the regulatory process does not skew the balance in a way that has adverse effects on institutions like yours. We see public value in your endeavors and, while we must ensure your banks are safe and sound, we do not want the regulatory process to overwhelm you.
The Federal Reserve, for example, recognizes the important role of MDIs in our economic development and progress and takes steps to promote the viability of these institutions through its Partnership for Progress program. Established in 2008, this program is designed to foster and support minority-owned and de novo depository institutions. As most of you know, at the core of the program is the implementation of a series of web-based modules and materials to assist banks in addressing three distinct development stages: starting a bank, managing the transition from startup to an established bank, and building shareholder value once a bank has been established on sound footing. This fall, the Federal Reserve plans to add the fourth web-based module on “Understanding and Improving your CAMELS Supervisory Ratings.” We believe that this fourth module will enhance all community bankers’ understanding of the thought process that bank examiners follow and the key decision points they consider when assigning CAMELS ratings to a bank. Our hope is that this module will help promote more effective interaction between bankers and examiners with regard to examination ratings.
As is the case with the other federal regulators, the Federal Reserve is combining the coordination of our MDI technical assistance program with efforts under way to support community banking organizations more generally. By joining these efforts, we hope to be able to more effectively highlight how MDIs can benefit from efforts to limit regulatory burden and foster prudent lending among all community banks. An important part of this effort will be a linking of the Partnership for Progress website8 with the Community Banking Connections website9 to unite resources that are beneficial to both community banks and MDIs. In addition, we continue to work with District Partnership for Progress program coordinators at each Federal Reserve Bank on outreach and training activities for MDIs, encouraging them to take into account and address the unique features of MDIs.
We need to remain committed to training our examiners on the business philosophy of MDIs. Effective communication is important in any partnership, so the Federal Reserve is in the process of instituting a post-examination program to follow up with state member bank MDIs after each examination to assess the quality of information flow during the examination and ensure that our examiners carefully addressed bankers concerns, explained the applicability of new regulations, and solicited input on how we can best support the MDI mission going forward.
Capital Attainment Opportunities through CDFIs
We clearly understand the issues some of your banks have encountered in raising new capital. One source of capital that may be of interest is the Treasury Department’s Community Development Financial Institutions Fund, or the CDFI Fund. We have some CDFIs here today, so many of you probably know that Congress created this fund in 1994 to promote economic revitalization and community development by supporting community development financial institutions. With this objective, this fund promotes access to capital through a number of competitive award programs. Some of the awards available to CDFIs include the Bank Enterprise Award Program, which provides a financial incentive to banks to invest in their communities, and the Native Initiatives Award, which provides financial assistance to Native-American CDFIs.
Similarly, the Treasury plans to launch a multi-billion dollar initiative under the CDFI Bond Guarantee program to assist CDFIs in making investments for eligible community or economic development purposes. Upon completion of the final rules, MDIs with CDFI certification may access this program. As minority depositories, many of you are eligible to become a certified CDFI without having to change your business model. In fact, almost 21 percent of MDIs currently are, or have been, certified CDFIs. This means that most of you have not become CDFI Fund-certified and might be able to benefit from the Fund’s programs. The CDFI’s website contains detailed eligibility criteria.10
In closing, I want to underscore the sharpness of the challenges you face. But as bankers at minority depository institutions, you are uniquely positioned to participate in fostering the well-being of the communities that remain economically stressed. We must continue talking and collaborating so that we do not stand in the way of addressing the best and most practical ways to address the challenges that you confront. These challenges are our country’s challenges, and I am confident that we will be successful in ensuring that your institutions remain strong and continue to provide critical financial support to your communities.
2 See Section 308 of FIRREA, Pub. L. No. 101-73, 103 Stat. 183 (1989)
4 See Robert. B. Avery, Neil Bhutta, Kenneth P. Brevoort and Glenn B. Canner, (2012) “The Mortgage Market in 2011: Highlights from the Data Reported under the Home Mortgage Disclosure Act,” Federal Reserve Bulletin, vol. 98, (December) pp. 1-46, at www.federalreserve.gov/pubs/bulletin/2012/articles/HMDA/default.htm.
5 Refer to “Do Bank Branches Matter Anymore?” O. Emre Ergungor and Stephanie Moulton, FRB Cleveland (August 2011), www.clevelandfed.org/research/commentary/2011/2011-13.cfm
6 Refer to “Bank Closings Tilt Toward Poor Areas,” The New York Times, Nelson Schwartz, (February 2011)
7 Refer to “Beyond the Transaction: Depository Institutions and Reduced Mortgage Default for Low-Income Homebuyers” O. Emre Ergungor and Stephanie Moulton, FRB Cleveland (August 2011), http://www.chicagofed.org/digital_assets/others/events/2011/bsc/moulton_0504.pdf. Also, evidence indicates that the incidence of higher-priced or more risk lending is greater for loans extended by depository institutions outside their local communities than it is within such areas. Refer to Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner (2006), “Higher-Priced Home Lending and the 2005 HMDA Data,” Federal Reserve Bulletin, vol. 92 (September) available at http://www.federalreserve.gov/pubs/bulletin/2006/hmda/default.htm.