FDIC, Microsoft and Truist to Create Fund to Invest in Minority-Owned Banks

FDIC, Microsoft and Truist to Create Fund to Invest in Minority-Owned Banks

Federal Deposit Insurance Corporation (FDIC) President Jelena McWilliams speaks during a Senate Banking, Housing, and Urban Affairs Committee hearing Tuesday, August 3, 2021 in Washington, DC, United States.

El Drago | Bloomberg | Getty Images

Federal Deposit Insurance Corp. This week will unveil a new investment fund backed by giant companies that will provide stakeholders with a way to funnel much-needed capital to banks owned and backed by people of color.

According to documents viewed by CNBC, the new mission-focused banking fund will invest exclusively in banks serving minority, low-income and rural communities, which often suffer from a shortage of long-term capital.

The project represents the latest government-backed effort to support minority-owned banks, which have struggled in recent decades due to failed loans, competitors who have grown as a result of mergers and acquisitions. and the financial collapse which resulted in the creation of small banks. . Banks have external influence.

FDIC President Jelena McWilliams told CNBC on Monday: “One of the things I heard very early on, and especially for black banks, was the lack of capital. Finding good capital was the thing. number 1 to enter banks.

Microsoft and Truist are the so-called anchor investors in the Financial Fund, each investing millions of dollars to help launch it. The fund, backed by media giant Discovery, has raised around $ 120 million to date.

The concept and design of the fund also supports a new school of thought on how best to support minority-owned and community-based banks, which emphasizes the importance of long-term “patient” capital.

Long-term investments – such as equity or debt financing – allow lenders more flexibility to lend capital to borrowers at a profit, the primary lever of income for retail and small business banks.

Supporters of minority banks hope that the greater number of business deposits or million-dollar certificates of deposit will give small banks enough time to not only generate profits, but also to help correct economic inequalities. based on race.

McWilliams said his early work on the fund included conversations with CEOs of small banks about how the federal government could best help them in its mission to promote homeownership and business creation among them. communities of color.

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“This fund will leverage other people’s investments under the FDIC brand,” she said, “and then allow every dollar to grow quickly and credit in these communities for the benefit of homeowners and small businesses. . ” Where it is needed. More.”

Established after the Great Depression of the 1930s, the FDIC is perhaps best known as one of the nation’s leading banking regulators, and it insures American consumers against sudden losses of deposits at member banks. In an effort to avoid “bank runs” through deposit insurance, the FDIC ensures that member banks meet various financial stability criteria.

Then-President Donald Trump appointed McWilliams to head the FDIC, and the Senate confirmed his appointment in May 2018.

The FDIC will have no role in the management of the fund, as this could lead to legal issues and potential conflicts of interest for the banking regulator.

Nonetheless, the idea for the fund was first floated by McWilliams, who said he was inspired by a robbery a few years ago. Flipping through her seatback television, she finally watched ABC’s popular investment show “Shark Tank”. Reruns of “Shark Tank” also air in prime time on CNBC.

“As I watched various investors pitch their topics to Shark, I thought to myself, ‘Well, why don’t we have a’ Shark Tank ‘type fund for minority depositories? McWilliams recalled. “I called Brandon as soon as I landed [Milhorn]Who is my chief of staff here? And I said, ‘Brandon, I wish we had a’ shark tank ‘for the minority banks.’ “

“And he said to me: ‘Oh my God! How are we going to do this? ‘”

Years later, the fund is ready to go. Investors will have a new way of channeling capital to two specialized categories of lenders, known as minority depositories and community development financial institutions, collectively known as “mission-driven” banks. .

The FDIC defines an MDI as any bank for which it ensures that 51% or more of the voting stock is owned by persons belonging to minorities, or that the majority of its boards of directors are members of a minority group and the community in which it operates. Serves consists mainly of minority groups. .

The Treasury Department certifies each MDI and CDFI, indicating that at least 60% of their total loans, services and other activities benefit low-income communities. In March 2021, the FDIC insured 142 MDI and 172 CDFI.

Banks hoping to invest from the mission-focused fund will make arguments to the board and the future manager, who will decide whether to provide equity investments, debt financing, loss-sharing agreements, or other capital. to the lender.

“The support of mission-driven banks aligns completely with Microsoft’s commitments to tackle injustice and racial inequality,” said Anita Mehra, vice president of global treasury and financial services at Microsoft, in prepared remarks. “We look forward to seeing the continued opportunities this will help provide for the banks and the mission-driven communities they serve.”

“MDI and CDFI play an important role in meeting the needs of minority and rural neighborhoods, and Truist has an established history of partnering with these organizations. We are expanding this engagement with an innovative approach to capital investment. and we believe this will dramatically improve the ability of these institutions to deliver positive results for our communities, ”said Truist CEO William H. Rogers Jr ..

Small community banks generate a large percentage of their available capital from customer deposits. But unlike equity investment or debt financing, deposits can be repaid at any time by depositors and are treated as liabilities on the bank’s balance sheet.

Failure to lend could have dire consequences, said Michael Pugh, chief executive of Carver Federal Savings Bank, a community bank that has made serving New York’s black communities a priority since 1948, said Michael Pugh, chief executive of Carver Federal Savings Bank. noted.

During the pandemic, “Nationwide, 41% of black-owned businesses have closed,” Pugh said on Monday. “A lot of these companies have gone awry because, frankly, they didn’t have access to the capital to survive a catastrophic situation.”

People walk past a store along 125th Street in the Harlem neighborhood of New York City on August 7, 2020.

Shannon Stapleton | Reuters

Black communities have been deprived of the US banking sector for decades.

In a 2016 complaint, the Consumer Financial Protection Bureau alleged that BancorpSouth illegally denied certain mortgages to black applicants in the Memphis area. The CFPB also said the bank has forced its employees to review applications from people of color faster than white applicants and not provide credit assistance to minority applicants.

Three years later, a review of more than 7 million 30-year mortgages led the University of California, Berkeley to conclude that black and Latino borrowers were “0.079% and 0.036% percentage points higher for l home buying and mortgage refinancing, respectively. Pay interest. Because of discrimination.

National statistics in 2020 showed that 75% of white households owned the house they lived in. Only half of Hispanic households could tell, while only 45.3% of black households had their own residence.

“The reason patient capital is needed is that institutions like Carver – the work we do is very focused on rebuilding communities by revitalizing them,” Pugh said. “If you don’t have equity investments, you don’t have capital and your lending opportunities are limited.

Pugh said the loans are critical to the bank’s ability to provide mortgages or provide funds to small businesses that “power the economic engines of our country.” As MDI and CDFI, Carver returns 80 cents on every dollar reinvested in deposits in Harlem, Brooklyn and Queens.

An FDIC survey last year found that 13.8% of black households in the United States do not have a bank account, compared to 5.4% of the total population.

Lenders argue that these differences reflect the fact that minorities have less money and lower credit scores. Their critics argue that inequality represents historical and structural problems that banks have a moral obligation to help solve.

“Banks, if you think broadly, we take deposits and then we lend that money,” Pugh said. “And we need to do it responsibly to help support the communities we serve. “

Disclosure: CNBC owns the exclusive rights to the off-grid cable of “Shark Tank”.

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