Showing posts with label H.R.4043. Show all posts
Showing posts with label H.R.4043. Show all posts

Friday, December 28, 2007

Minority Bank Regulation (From the Viewpoints section of the American Banker Newspaper, 12/28/07)

On October 30, 2007, the Subcommittee on Oversight and Investigations of the House Committee on Financial Services held a hearing to review “the role of minority-owned financial institutions.” My organization has been researching women- and minority-owned banks and thrifts since 1989. We feel minority banks, specifically African-American banks, need one thing and one thing only: Capital.

That regulators do not recognize this is indicative of their decidedly lax approach to the sector. It also suggests that they may not be meeting their responsibilities under the Financial Institutions Reform, Recovery and Enforcement Act, which requires regulators to take steps to preserve minority banks.

Banking is a field that depends upon precise numerical data, but federal banking regulators do not have a valid estimate of the number of minority banks in the U.S. According to our data, by June, 2007, there were 225 minority owned banks and thrifts in the U.S., up from 190 at the end of 2005. The Federal Reserve Board counts 200 minority depositary institutions. The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Financial Management Service of the U.S. Treasury, all have differing estimates. If banking agencies cannot agree on the number of institutions, it is unlikely they will be very effective in preserving them.

Consider the case where the Department of the Interior Office of the Special Trustee for American Indians awarded the Alliance Capital Management a contract to manage $404 million in Federal Government trust funds. This firm had been fined $250 million by the U.S. Securities and Exchange Commission in 2003 for defrauding mutual fund investors.

An imaginative approach would have moved the trust funds to one or more of the 21 Native American banks in the U.S. instead, since placing Alliance in a position of trust is, given the SEC’s enforcement action, inconsistent with common sense, with the interests of justice and efficiency and with the interests of Indian beneficiaries. Giving federal banking regulators the power to take such an action is one legislative fix required.

Minority banks lead the industry with respect to asset growth. By June, 2007, annualized asset growth was 17.43% at minority institutions, compared to an industry growth rate of 6.38%. This reflects continued expansion at Hispanic institutions and remarkable growth at Asian institutions. Income has not followed suit…yet. From January, 2007 to June, 2007, minority bank and thrift net income totaled $616,416,000, almost twice what they earned in the full twelve months of 1998, $373,404,000.

Profitability is an issue. Minority bank return on assets averaged 0.09% by 6/30/07. For all FDIC-insured institutions, ROA was 1.21% by June, 2007.

Regulators underestimate the severity of the issues these institutions face, and do not give them sufficient credit when they perform well.

In light of the subprime problems impacting major financial institutions, we note that minority banks outperformed the industry with respect to loan performance. By June, 2007, net charge offs as a percentage of average loans totaled 0.21% at minority institutions and 0.47% at all FDIC-insured institutions. In 2006, charge offs as a percentage of average loans totaled 0.27% at minority institutions and 0.39% at all FDIC-insured institutions. In 2005, percentages were 0.20% and 0.50%, respectively.

Different ethnic groups have different financial needs. A “one size fits all” regulatory strategy may not make sense. Banks founded by newer Hispanic and Asian immigrants are more concerned with business financing. These groups are growing fast and do not require much assistance from banking regulators, other than training and technical assistance.

On the other hand, African American institutions face pressures other minority banks do not. They are the only group within this sector facing a significant decline in number. The only assistance offered by the banking regulators consists of training and technical assistance, important, to be sure, but insufficient to preserve the number of African-American institutions.

By lumping Asian, African American, Hispanic, Native American and Women-owned banks and thrifts into one large category, regulators do the sector and the country a disservice. Again, more precision is needed.

We believe regulators should focus on capital and capital related issues at minority banks, specifically African-American banks. A training and technical assistance program targeting minority banks announced by the Federal Reserve takes a step in the right direction: the first training module includes guidance for accessing capital. More help is needed.

In 1992, we developed the first CRA securitization, a Fannie Mae MBS security backed by home mortgage loans originated by minority banks and thrifts. This innovation spurred the development of over $100 billion in non-subprime, safe and sound CRA lending. Likewise, we believe the promotion and implementation of capital access tools will significantly increase the flow of capital to minority banks, and by extension, to all sectors in society. This increase will, in turn, result in significantly increased general economic activity in the communities served by minority banks.

We estimate that a $1 billion dollar minority bank capital facility will generate $10 billion dollars in economic impact over five years, assuming a capital access system operating without significant falsification and fraud.

We believe this is an investment worth making.