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FDIC, Microsoft and Truist Create Funds to Invest in Minority-owned Banks

Elena McWilliams, Chairman of the Federal Deposit Insurance Corporation (FDIC), spoke at a hearing of the Senate Bank, Housing and Urban Affairs Commission in Washington, DC, USA on Tuesday, August 3, 2021.

Aldrago | Bloomberg | Getty Images

This week, the Federal Deposit Insurance Corporation announces a new investment fund backed by corporate giants. This allows stakeholders to direct their coveted capital to banks owned and supported by people of color.

According to documents read by CNBC, the new Mission-Driven Bank Fund will invest exclusively in banks that serve minorities, low-income earners, and local communities who often suffer from long-term capital shortages.

The project is government support to help minority-owned banks struggling for decades due to loan failures, larger competitors as a result of mergers and acquisitions, and a financial recession that has a significant impact on small banks. Represents the latest efforts of. ..

FDIC Chairman Jelena McWilliams said on Monday, “The first thing I heard about black banks was the lack of capital. It was best to find good capital to come to the bank.”

Microsoft When Truist Financial The fund’s so-called anchor investors, each investing tens of millions of dollars to support its launch. The fund, which is also backed by media giant Discovery, has raised about $ 120 million to date.

The fund’s vision and design also implicits a new way of thinking about the best ways to support minority-owned, community-focused banks, centered on the importance of long-term “patient” capital. I support it.

Long-term investments such as equity and debt financing give lenders more flexibility to profit and lend capital to borrowers. This is a major way to make money for consumer banks and small business banks.

Proponents of minority banks have enough time to help more million dollars of corporate deposits or more certificates of deposit not only generate profits, but also correct racial economic inequality. I want to buy from a small bank.

McWilliams said that her early work on the endowment was about how the federal government could do its best in their mission to boost home ownership and business formation among color communities. He said it included a conversation with the CEO.

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“The fund is supposed to leverage investments from others under the FDIC brand, and exponentially increase and need all dollars for the benefit of homeowners and small businesses. You can earn credibility in the community. Many. “

Founded in the aftermath of the Great Depression of the 1930s, the FDIC is perhaps best known as one of the top US banking regulators and guarantees US consumers from sudden deposit losses at member banks. .. The FDIC has confirmed that member banks meet various financial stability indicators to prevent “bank runs” from deposit insurance.

President Donald Trump at the time nominated McWilliams as the leader of the FDIC, and the Senate confirmed her appointment in May 2018.

The FDIC plays no role in managing the fund as it can cause legal issues and potential conflicts of interest with banking regulators.

Still, the idea for this fund was first proposed by McWilliams, who said he was inspired during the flight a few years ago. She flicked her seatback TV and finally listened to ABC’s popular investment show, Shark Tank. A rebroadcast of “Shark Tank” will also be aired on CNBC’s Golden Time.

“Looking at various investors marketing the theme to sharks,’Well, why not have a fund like’Shark Tank’for a few depository institutions? “McWilliams recalled. “I called Brandon as soon as I landed. [Milhorn]Who is my Chief of Staff here? And I said, “Brandon, I want you to have a’Shark Tank’for minority banks.”

“And he’s like,’Oh Lord, how do you do that?'”

A few years later, the fund is ready to launch. Investors will have new ways to capitalize on two special classes of lenders, known as minority depository institutions and community development financial institutions (collectively, “mission-driven” banks).

The FDIC holds MDI with more than 51% of its voting shares owned by minority individuals, or a majority of the company’s board of directors is a member of the minority group, and the community providing the service is primarily the minority group. Defined as a configured bank. ..

The Treasury has accredited all MDIs and CDFIs. This must show that at least 60% of their total lending, services, and other activities benefit the low-income community. As of March 2021, FDIC Insured 142 MDIs and 172 CDFIs..

Bank leaders wishing to invest from a mission-driven fund submit their proposals to the committee and the next manager. The manager decides whether to provide the lender with a stock investment, debt loan, loss sharing agreement, or other capital.

Anitamera, Corporate Vice President of Global Finance and Financial Services at Microsoft, said in a prepared statement, “Supporting mission-driven banks addresses racial injustice and injustice. It’s in perfect agreement with our commitment. ” “We look forward to seeing this ongoing opportunity to help deliver to mission-driven banks and the communities in which they serve.”

“MDI and CDFI play an important role in meeting minority and local needs. Truist has a history of partnering with these organizations. We are committed to this effort through an innovative approach to capital investment. We are confident that this will significantly strengthen these institutions: “The ability to deliver positive results to our community,” said William H., CEO of Truist. Rogers Jr. said.

Small community banks tend to generate a significant percentage of the capital available through customer deposits. However, unlike stock ownership and debt lending, deposits can be redeemed by savers at any time and are considered debt on the bank’s balance sheet.

Michael Pugh, CEO of Caixa Econôte Savings Bank, a community bank that has prioritized services to the black community in New York City since 1948, said the inability to lend was disastrous when economic conditions deteriorated. He said it could have some consequences.

During the pandemic, “41 percent of black-owned businesses at the national level have closed,” Pugh said Monday. “Frankly, many of these businesses failed because they didn’t have access to capital to survive the catastrophic situation.”

People walk by a closed store on August 7, 2020, along 125th Avenue in the Harlem district of New York City.

Shannon Stapleton | Reuters

The black community has been underserved by the US banking sector for decades.

In a 2016 complaint, the Consumer Financial Protection Bureau claimed that BancorpSouth illegally refused certain mortgages to black applicants in the Memphis region. The CFPB also argued that banks forced employees to review colored applications earlier than white applicants and not provide credit support to minority applicants.

Three years later, after a review of over 7 million 30-year mortgages, the University of California, Berkeley concludes that black and Latin borrowers pay interest of 0.079% and 0.036% on home purchase and refinancing mortgages, respectively. I did. , For discrimination. “

National data showed that in 2020, 75% of white households owned the home they lived in. Only half of Hispanic households could say the same, but only 45.3% of black households owned their homes.

“The reason we need patient capital is because institutions like Carver-the work we do is very focused on rebuilding by revitalizing the community,” Pew said. .. “Without equity investment, we have no capital and our lending opportunities are limited.”

According to Pugh, the loan is important to the bank’s ability to provide and fund mortgages to SMEs that “run our economic engine.” As both MDI and CDFI, Carver will reinvest the $ 1 80 cents received in deposits in Harlem, Brooklyn and Queens.

Last year, 13.8% of black American households did not have a bank account at all, while 5.4% of the total population did not have a bank account, according to a FDIC survey.

Lenders claim that these differences reflect the fact that minorities tend to have low cash on hand and low credit scores. Their critics argue that inequality represents a historical and structural problem that banks have a moral obligation to help resolve.

“Banks, if you think of a comprehensive premise, we receive a deposit and then we lend that money,” Pew said. “And we should do it in a responsible way to support the communities we serve.”

Disclosure: CNBC owns exclusive off-network cable rights to “Shark Tank”.

FDIC, Microsoft and Truist Create Funds to Invest in Minority-owned Banks

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