Chairwoman Beatty, Ranking Member Wagner, Chairwoman Waters, Ranking Member McHenry and Honorable Members of the Subcommittee, thanks so much for having me here today. I’m honored to appear before you.
My name is Fabrice Coles and I appreciate the invitation to discuss the efforts of the banking industry to address racial inequality. I am a Vice President of Government Affairs at the Bank Policy Institute, a nonpartisan public policy, research and advocacy group representing the nation’s leading banks. BPI members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ nearly 2 million Americans, make 68 percent of all loans and nearly half of the nation’s small business loans and serve as an engine for financial innovation and economic growth.
Madame Chair and esteemed Members of this Committee, I have worked with these financial institutions since 2019. I am here today to report that the nation’s banks are rising up to meet the moment, helping reduce racial inequity by leveraging business models, networks and resources to better serve Black communities. Banks are actively engaged across the country in efforts to bring change – especially in the wake of the deadly pandemic and global awakening brought about by the murder of George Floyd.
I have led a working group composed of senior executives at BPI member banks to identify effective and innovative practices in this area. Banks already have built strategies, agreed upon budgets, allocated resources and built teams to execute on this agenda. Investments have been made. Partnerships have been cemented. Product innovation is ongoing. Philanthropy is continuing and focused on sustainable results. More than $50 billion has been committed. Billions have already been disbursed to communities across the country. In short, progress has been made, but given the nature of centuries of financial exclusion, muchmore remains to be done.
Banks are pursuing initiatives to drive greater financial inclusion and close racial equity gaps. Like other institutions in our society, financial institutions have sought to reduce racial equity gaps in income, education, housing and wealth with renewed urgency in light of the events of the past several years. Banks must be a part of the solution if there is to be meaningful improvement in outcomes for communities of color. Today our focus is on their efforts to reduce inequality with regard specifically to Black Americans. Many banks have worked to address racial equity concerns within their organizations and their communities for many years, but the events of 2020 – the pandemic’s disproportionate impact on Black communities and the global response to the murder of George Floyd – have spurred fresh thinking, and action.
Banks are taking actions to combat racial equity gaps in the following ways:
- Investments
- Partnerships
- Product innovation and
- Philanthropy.
Investments
BPI member banks know that in order to reverse course on centuries of financial exclusion, it is imperative that banks take the long view and invest in people and organizations that are producing economic growth in communities of color. BPI banks are making capital investments in community development financial institutions (CDFIs) and minority depository institutions (MDIs), investing in the next generation of Black entrepreneurs, and supporting neighborhood revitalization efforts alongside Black-owned investment firms. Banks are investing debt and equity capital but also supplying sweat equity working alongside partners to ensure that these investments bring shared prosperity. Lastly, banks are investing in the future of their own organizations by redoubling their efforts to recruit, retain, empower and promote Black talent.
CDFIs + MDIs
CDFIs and MDIs play pivotal roles in channeling needed financial resources to underserved communities. But due to the economic challenges faced by their customers and their stakeholders in general, these institutions require increased investment. These firms are an especially important delivery mechanism of capital to Black-owned small businesses that have been disproportionately harmed by the pandemic. BPI member banks and MDIs/CDFIs have had relationships for many years, but since 2020, banks have increased their support for these institutions. More than $1 billion has already been committed to CDFIs and MDIs in 2020 alone, with the largest eight banks committing close to $10 billion since 2015. Banks are focused on making grants and equity investments aiming to support MDIs’ and CDFIs’ ability to improve their reach, a significant benefit to the communities they serve. In addition to equity investments and grants, banks are investing alongside these firms in revenue-generating deals and providing technical assistance as needed. Lastly, banks are also investing in the growth of next-generation minority-owned FinTechs that are focused on financial inclusion.
Investments in Black-Owned Businesses: Debt and Equity Capital
Clearly, Black-owned businesses were severely damaged by the pandemic. The road to rebuilding will be long, but banks are working with Black-owned small businesses to provide low-cost loans and equity investments to help entrepreneurs build, grow or rebuild their businesses. Young firms are an especially promising cohort, and Black founders tend to lack access to equity capital, similar to debt capital access disparities, so banks are increasing their investments in equity of early-stage Black-owned ventures. (For information on small business grants, see “Philanthropy.”) The billions of dollars committed will help drive job retention and creation as the economy reopens after this devastating pandemic.
In addition to these efforts, during the pandemic, BPI member banks supported the recovery. BPI’s research also has demonstrated that BPI members’ Paycheck Protection Program (PPP) activity had a significant presence in minority communities: 30 percent of the loans originated by the nine largest retail banks went to areas with greater than 50 percent minority population, compared to 23 percent of the loans of smaller banks and nonbank PPP-participating institutions. About 28 percent of loans originated by all banks larger than $50 billion in assets went to majority-minority neighborhoods.[1]
Investments in Diversity and Inclusion
One of the best investments any bank can make is in its own people. As this Committee described in its 2020 report on Diversity and Inclusion, at 44 of the nation’s largest banks, there was much more work to be done to increase diversity and inclusion at the highest management levels. Banks had been investing in their performance on key accountability metrics for improvements in diversity and inclusion within the firms prior to the pandemic. The events of 2020 brought more focus to these efforts, and there are now more diverse C-suite executives, board members and personnel at America’s major banks than there were in 2019, the year the Committee started its comprehensive D+I data request. In the past year alone, there have been thousands of new hires and promotions at BPI member banks. Black team members are being recruited and empowered. While there is more work to do, banks are committed to ensuring that the senior levels of the firm look more like America and are dedicating resources to bring about that reality.
Banks are also investing in the diversity of their suppliers, supporting minority-owned businesses while meeting their own needs. Since 2020, banks have expanded the rosters of supplier partners and have plans to further expand this focus with billions of dollars of additional investment activity in diverse suppliers announced.
Partnerships
Banks are scaling the impact of their efforts by partnering to hasten the delivery of broader access and support to Black customers and communities. The banks’ partnerships are varied. Banks have been partnering with federal regulators and state and local governments to promote new thinking about how to significantly broaden access to banking services, credit and job creation. They’ve been working with national organizations to provide increased affordable housing counseling and home purchase support. Banks have joined with non-profit organizations to perform critical policy research related to Black communities or to scale the provision of technical assistance, talent development and technology consultation services to MDIs/CDFIs. They have committed to working with Historically Black Colleges and Universities (HBCUs) to invest in the pipeline of future financial services industry talent. And banks have entered into joint ventures to successfully execute revenue-generating billion-dollar deals with Black-owned broker-dealers and MDIs.
Banks have joined forces with the Office of the Comptroller of the Currency and with various leaders from the MDI sector to promote greater financial inclusion and the reduction of impediments to capital access by Black communities. This initiative, known as Project REACh, aims to improve credit underwriting processes and reduce the ranks of credit invisibles, increase the supply of affordable housing and revitalize MDIs. BPI member banks are also engaged in similar conversations about expanding and sustaining support for MDIs at the Federal Deposit Insurance Corporation. These partnerships can yield important long-term benefits for Black communities as a part of a broader set of partnerships across the country that are producing ecosystems of support for vital economic inclusion, capital access and community development efforts.
In addition to federal government partners, banks are also working in tandem with numerous entities and organizations to boost local impact. They are working with municipal governments and chambers of commerce to promote greater access to credit and job creation and with national civil rights groups on disparate initiatives like affordable housing counseling. As another example, one of BPI’s member banks recently partnered with the National Urban League to expand access to transaction accounts. Banks have also joined forces with non-profits to fund research related to Black communities to better serve Black entrepreneurs and to help invest in MDI/CDFI partner-related initiatives.
Importantly, banks are partnering with HBCUs to invest in the pipeline of future financial services industry talent. These partnerships have resulted in investments in academic facilities, in new curricula executed by the banks in direct communication with students, in entrepreneurship competitions resulting in real investments and in increased financial support for finance students to help them defray the costs of their education. Banks are excited about these partnerships in particular because their benefits will accrue to the banks and to the HBCUs for many years to come.
Lastly, banks are engaged with more Black-owned businesses on revenue-generating business deals. These business partnerships have taken the form of loan participations in large financings with MDIs and debt distribution deals as a part of capital markets syndicated financing with Black-owned broker-dealers. There is an upward trend in business opportunity for both MDIs and Black-owned broker-dealers since the onset of the pandemic, and with more exposure for these firms’ products and services, it is expected that these opportunities will contribute to improved financial performance for these firms, further enabling them to better serve their communities in powerful examples of a virtuous cycle produced by directly engaging minority businesses.
Bank Products
Banks are offering more services and expanding credit products for underserved borrowers. The pandemic evinced the need for greater access to transaction accounts, especially as economic activity migrated online and to mobile devices. Banks are greatly expanding their offerings of no-fee, low-minimum-balance accounts to help attract more customers into the banking system, and once they become customers, banks are deepening those relationships by offering bridge loans and small-dollar and special-purpose credit options, support for first-time home buyers and increased small business lending. Beyond these current efforts, banks are also keeping an eye on the future and exploring how AI and alternative data can be leveraged to better understand credit risk in order to decrease the cost of credit products for borrowers who have been underserved in the past.
Bank On Transaction Accounts and Small-Dollar Lending
Banks have expanded their offering of low-fee transaction accounts with features that are attractive to unbanked and underbanked consumers. Many BPI member banks (with more in the pipeline) have designed these products in accord with the standards for “Bank On accounts,” a designation of eligible bank accounts by the Cities for Financial Empowerment (CFE) Fund.[2] Bank On accounts help promote financial inclusion through expanded access to low-cost transaction accounts, products that we have seen are critical to helping customers transact in the modern economy, especially during the pandemic.[3] This could be a viable option to help more Black households engage with the banking system to develop deeper customer relationships and to access more affordable and consumer-friendly financial products than those available in the nonbank marketplace.
BPI banks are also working to provide more small-dollar credit products to help customers manage unexpected expenses. These loan products represent safer, more consumer-friendly alternatives to nonbank payday products. BPI banks have started offering small-dollar loans with consumer-friendly features that are also affordable and transparent. With these products in the market, customers have an alternative to small-dollar credit providers in the nonbank sector that could have much higher interest rates. BPI recently secured CFPB approval for a Small-Dollar Loan No-Action Letter template that banks can leverage to fashion their own iteration of small-dollar loan products. BPI research has shown that these products could be highly useful in helping households deal with unexpected expenses and, in conjunction with low-fee transaction accounts, could deepen banking system interactions by the unbanked and underbanked.[4]
Real Estate Investment and Support
Banks have long supported affordable housing development and neighborhood revitalization in hopes of promoting homeownership, but since last summer, banks have augmented their existing efforts with fresh commitments to accelerate the impact, and real estate support represents a significant portion of banks’ overall racial equity promotion efforts. Banks are helping first-time Black homeowners purchase their homes with down payment grants, low-interest loans and a helpful array of related programming, such as housing counseling efforts, to make the home-buying process less onerous and costly.
In addition to helping individual homeowners, banks are working with diverse developers to ensure that new real estate developments, like affordable rental housing units and new commercial spaces, benefit the future residents but also help recycle capital through communities of color. Banks’ focus on affordable housing and commercial development is especially notable in their partnership with CDFIs with a goal of driving greater access to affordable housing supply and financing for underserved borrowers, including Black borrowers.
Philanthropy
The pandemic and a renewed focus on improving outcomes for Black Americans has created an important moment for philanthropy, with a surge in contributions. BPI member banks have pursued strategies that have combined the efforts of business units and the philanthropic organization to optimize and boost results and speed of delivery.
Banks have removed barriers to quick deployment of grant funds and broadened the permissible uses of funds. Some banks reassessed their grantmaking schedules and procedures to streamline the process and expedite payments to meet the massive demand called for by the pandemic and the racial justice moment. Banks have also permitted grantees to leverage the funding in more diverse ways, including for administrative expenses to address issues associated with the pandemic.
Banks are also listening to their employees’ recommendations about how to best allocate grant funding, with new types of organizations (such as arts and entertainment providers focused on children’s programming) and new leaders (such as those running social justice organizations) emerging as potent partners for change. There has also been a renewed focus on leveraging philanthropy to drive results in key areas of focus like housing and entrepreneurship via down payment assistance and small business support grants.
Advocacy
In addition to actions banks themselves are taking, they have been working to promote policy changes that they believe would improve financial inclusion for underserved communities and help close racial equity gaps.
Engaging Regulators and Congress
Banks have observed tensions among competing regulatory goals of safety and soundness, fair lending, community development and financial inclusion. The complexity of the regime that executes enforcement of laws and regulations across a number of agencies and supervisory teams leads to significant challenges in expanding capital access at scale. Banks are engaging Congress and their regulators in conversations about striking the proper balance to ensure that these frictions do not create unnecessary impediments to the appropriate deployment of capital for Black communities.
Banks are also advocating for reconsideration of the role real estate appraisals play in community development lending. Banks face challenges supporting commercial neighborhood renewal efforts due, in part, to current regulatory standards that may be making it prohibitively difficult to lend to community developers that face low appraisal values for the properties they seek to use as collateral for loans. Consequently, large-scale renewal and reinvestment efforts are hampered, as the costs of improvements exceed the appraised value. This situation also creates a disconnect and tension between potential expanded CRA activity and safety and soundness requirements. Banks have joined other advocates to call for policymakers and regulators to resolve this in a way that manages risk but allows for investment in underserved communities.
Banks have also expanded their advocacy efforts on Capitol Hill in favor of issues that will help close racial wealth gaps and drive equity. For example, banks recently supported a $1 billion annual budget for the CDFI Fund during the appropriations process in order to better meet the demand for the CDFI sector’s products and services. Banks have also joined many other industries in supporting efforts to disclose self-reported identity characteristics of board members and C-suite officials to shareholders.
Conclusion
Throughout our nation’s history, banks have been essential to America’s economic growth. While they help drive our prosperity, banks also serve as a mirror for the broader events in society.
When the world watched as George Floyd was murdered, America paused and considered what could be done to improve equity and inclusion. America’s banks were a part of that triggered public conscience, and in the year since that tragic event have rededicated efforts to be a driver of brighter days ahead for all American communities.
BPI has submitted to the Subcommittee a living strategy document primarily created for the banks themselves in the midst of last summer’s remarkable public conversation about racial justice. We hope it gives the public and the Committee a view into the seriousness of the tactical considerations underway at America’s banks to support broad-based economic opportunity. We have included with our testimony an appendix that includes a sampling of some of our members’ commitments that we thought would illustrate some of the actions we have outlined here in our testimony.
An honest assessment of the foundation that has been laid leaves me with a parting thought which is that while much has been done, unfortunately much more is left to do. But I can say that I am hopeful, and I hope my testimony gives you grounds for that hope as well.
Thank you for having me here today, and I look forward to taking your questions.
[1] https://bpi.com/underserved-small-businesses-turned-to-large-banks-for-ppp-loans-during-2020/
[2] https://joinbankon.org/#/resources#bank-on-national-account-standards
[3] https://bpi.com/bank-on-transaction-accounts-making-traditional-banking-more-inclusive/
[4] https://bpi.com/a-new-path-to-offering-small-dollar-loans/
