MDIs, CDFIs, and the Mosaic Theory; Is Positive Change on the Horizon? by Andrew Taber, Impact Investing Analyst

 

On June 15th, several American financial and political leaders convened in distinct discussions concerning the future of Minority Deposit Institutions (MDIs) and Community Development Financial Institutions (CDFIs). At a White House press conference, a Federal Deposit Insurance Corporation (FDIC) Board meeting and MDI policy statement release, in a House Financial Services Committee statement, and a Georgetown University forum with an all-star cast, minority lending was the conversation of the day. Utilizing the Mosaic Theory, Creative Investment Research contends that the convergence of these events may not be a coincidence, and may signal a significant policy change.

We note that the MDI events of June 15th were preceded by a June 14th meeting of the California Public Employees’ Retirement System (CalPERS) Investment Committee. Of particular relevance was a progress report on the Fund’s Sustainable Investment 5 Year Strategy Plan. Fund management discussed diversity and inclusion that synched with the MDI discussions of June 15th. We further note that important financial organizations like CalPERS are prioritizing corporate board diversity in the investments they make. The Fund’s strategic corporate governance principles allow them to directly impact and improve board diversity. Overall diversity trends are positive, as both gender and racial board diversity appear to be increasing across S&P 500 companies. While the examples provided by the Fund focused on gender diversity, it is clear that large pension funds, like CalPERS, value and are pushing for increased corporate board diversity. This discussion simply highlights simultaneous policy moves outlined on the following day, and provides a context for why we think these change are both significant and positive. 

On June 15th, the White House brought Vice President Kamala Harris, Treasury Secretary Janet Yellen, and the Chairwoman of the House Financial Services Committee, Maxine Waters, together with Senator Mark Warner, and Opportunity Finance Network CEO Lisa Mensah to announce the release of $1.25B in funding to CDFIs and MDIs. Their discussion focused on the importance of financial equity and the disproportionate effect that the Covid-19 pandemic and ensuing recession has had on communities of color. The fact that these impactful and important American policy makers all gathered on one day signaled a push towards improved inclusion through direct financial investment. Representative Waters, in particular, made it clear that, while $1.25B in community development funding was historic, it is only the beginning. This was seconded by Senator Warner, who, after discussing inequities in venture capital and the decline in the number of Black banks after the 2008 recession, explained that not only will there be $1.75B more in direct community investments to come, he calculated that a $9B investment in these institutions should lead to $90B in community lending through gearing. This is certainly a significant moment, heightened by other events of the day.

The Federal Deposit Insurance Corporation released a “Statement of Policy Regarding Minority Depository Institutions.” In this policy statement, the FDIC outlined its prior efforts to support MDIs and reviewed the unique challenges these institutions face. The FDIC MDI Policy statement updates the public on steps the FDIC is taking to enhance its MDI program. Responding to commenter queries, the agency clarified several of its goals. In particular, the statement notes that the FDIC will assist and support new and existing MDIs through education programs and technical assistance. Of particular interest, the FDIC will try to preserve equity even in failing institutions by helping qualified MDI institutions merge, as opposed to being purchased by non-MDI financial institutions. 

As an independent agency, the FDIC’s statement demonstrates a renewed commitment on the part of the American government to increase financial equity, assist minority-led institutions, and support communities of color that have been ravaged by the COVID pandemic and by centuries of inequity.

These two events tied directly to the Georgetown University and Black Economic Alliance forum titled “Can Black and Brown Banks Compete in a Digital Economy?” The event included many important voices, including Representative Maxine Waters, Senator Mark Warner, and FDIC Chair Jelena Williams. These policymakers spoke at the Georgetown forum after the White House MDI event. While Rep. Waters and Sen. Warner reemphasized several of the points they made earlier in the day, they also emphasized the importance of technology for Black banks. Additionally, they noted that the shocking decline in Black banks and MDIs since 2008 is particularly problematic given the pandemic; communities hit hardest by Covid-19 are losing the institutions that serve them best. Chairman McWilliams drove this point home, explaining the crucial role non-minority banks need to play by forming partnerships with MDIs. Currently, many Black banks are not capturing economies of scale required to continue to operate. She punctuated her remarks by describing the current FDIC as “not-your-grandmother’s-FDIC”, signifying that a policy shift has occurred and implying that the FDIC will do more to improve financial access in minority communities that have been historically abandoned and excluded. 

The Georgetown event had important takeaways as well. A clear theme concerned the role of technology. While many claim that technology is inherently unbiased and thus increased financial technological development and automation should reduce inequalities, several of the speakers at the Georgetown event warned that racism is so ingrained in the American system that discriminatory practices, whether intentional or not, may be coded into new technological financial tools. Thus, technology solutions should be targeted and carefully crafted, and should have reliable and accountable governance practices imbedded. Other steps must be taken as well. For instance, Comptroller of the Currency Michael Hsu suggested revitalizing MDIs, and second, getting all American credit scores higher. This push towards supporting MDIs was seen across all of the events. 

Creative Investment Research contends that the Mosaic Theory may apply here. The Mosaic Theory is described as the idea that multiple independent sources of information can collectively be used to support a larger claim and infer an overall conclusion. The mosaic theory is commonly used in investment research to assist with valuation. In this case, the combination of discussion and statements by the U.S. Vice President, the Chairwoman of the House Financial Services Committee, the Secretary of the Treasury, the Chairman of the FDIC, and a plethora of other important financial and policy experts, actors, and organizations on the importance of Minority Deposit Institutions, on the same day, may be more than a coincidence. That is, while it is entirely possible that the $1.25B in MDI and CDFI funding announced on the 15th may stand alone, when considered in conjunction with the White House event and the FDIC policy statement., it appears that MDI and CDFI investment is solidly on the policy agenda; these actors seem to be moving collectively, or even preemptively, and other important and significant policy changes are forthcoming. The $1.25B may be just the beginning. 

Creative Investment Research optimistically looks forward to seeing what may come in the following days and weeks, as improving equity and supporting Black and Brown banks are pivotal to our mission; if Black banks and MDIs continue to close with little support, American inequality will only increase. However, if the American political regime continues to prioritize these markets and institutions, with consideration and accountability, positive change may be on the horizon. 

Andrew Taber, Impact Investing Analyst

Editor: William Michael Cunningham