A look at how banks perpetuate racial disparities : The Indicator from Planet Money Black-owned financial institutions are a shrinking part of the U.S. financial system. We look at what that means for America's entrenched racial disparities.

Why We Need Black-Owned Banks

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This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.

DARIUS RAFIEYAN, BYLINE: And I'm Darius Rafieyan. Netflix just announced that it would be shifting 2% of its cash reserves - nearly a hundred million dollars - into Black-owned banks.

MARTIN LUTHER KING JR: This is part of a broader movement, the #bankblackmovement, which encourages people to take their money out of big mainstream banks and deposit it instead into Black-owned financial institutions. This idea is not a new one. Martin Luther King Jr. in his final speech the night before he was assassinated in 1968 called on the residents of Memphis to stage a, quote, "bank-in."


KING: Take your money out of the banks downtown and deposit your money in Tri-State Bank.

RAFIEYAN: Tri-State Bank is a Black-owned bank in Memphis that's still operating to this day. But today, Black-owned banks are a shrinking part of the American financial system. There are currently only 21 Black-owned banks in the U.S., down from 36 a decade ago. Collectively, they control just $4.8 billion, less than 1% of the nation's banking assets.

VANEK SMITH: Today on the show, we look at why this matters - the importance of Black-owned banks - and why something like banking actually plays a crucial role in America's racial disparities.


RAFIEYAN: Sidney King is the president and CEO of Commonwealth Bank in Mobile, Ala.

SIDNEY KING: Commonwealth was founded back in 1976. It is the only bank chartered in the city of Mobile. We're the only homegrown bank here in Mobile.

VANEK SMITH: It's also the only Black-owned bank in Mobile. And it's pretty tiny by banking standards, only about $49 million in assets. They do checking, savings, small business loans. They have a small mortgage business which they're trying to grow. But like many Black-owned financial institutions, they have seen their assets dwindle over the past 10 years.

KING: Our numbers have shrunk considerably. We are an endangered species.

RAFIEYAN: To understand why this matters, it's important to look at the racial wealth gap in the U.S. So the median white household has about $170,000 worth of wealth. The median Black household has about 17,000. In other words, white households have on average 10 times the wealth of Black households. And the reason for this has a lot to do with banks because the main driver of wealth creation in this country is homeownership.

KING: Because for most people, the wealth is - you know, the wealth accumulation is in the home. Most people don't have disposable income because they are living from paycheck to paycheck. But that appreciation in the home is where their net worth typically grows. You know, when you look at mortgages that are made by the majority banks, typically less than 1% of their mortgages are to African Americans.

RAFIEYAN: This disparity has its roots in the 1930s and the New Deal. A big part of that package of legislation was the creation of federal agencies to encourage homeownership such as the Federal Housing Administration or the FHA. It subsidized home loans and helped fund the creation of massive suburban housing developments all over the country. Mehrsa Baradaran is the author of "The Color Of Money: Black Banks And The Racial Wealth Gap." She says that America's post-war housing boom was no happy accident, but rather the result of very targeted federal policy.

MEHRSA BARADARAN: In 1934, what the FHA, the New Deal-era credit agencies do is that they unleashed this unprecedented massive mortgage market. They create the 30-year fixed rate mortgage, which creates the America that we know now. There were no mortgages before then. There were no suburbs. There was no American middle class in the way that we think of it. They created an American middle class, and they coded it as white.

RAFIEYAN: When the FHA subsidized the creation of these suburban housing developments, it would only do so on the condition that no homes be sold to Black families, and that every home have written into its deed that it could not be resold to a Black family. This meant that the benefits of this massive federal housing program went mostly to white families. And it was the banks that became the mechanism for this discrimination.

VANEK SMITH: The Civil Rights Act of 1968 formally outlawed housing discrimination, but Mehrsa says there was a systemic bias built into banking that was never fully addressed.

BARADARAN: What we didn't do when we had the Civil Rights Act is to say, OK, let's fix it. We had for hundreds of years a race-based credit system, a race-based economy that excluded Blacks, that created poor neighborhoods here and then rich neighborhoods there. And what the Civil Rights Act say is no more discriminating. From now on, we're colorblind. And that's not how markets work. It's not - you can't just stop talking about it because they were saying, well, you can't discriminate on a Black homeowner based on their race. They're like, oh, no, no, we're not. We're discriminating based on the ZIP code and their FICO score. Oh, OK. Well, in that case, go ahead and sell the subprime loans into those Black neighborhoods 'cause that's what happened in 2008, right? So they sent - banks sent the subprime lenders into certain neighborhoods and not others. Right? And so that - so when the subprime crisis happens, Black communities lose 53% of their wealth - just gone, not recovered.

RAFIEYAN: Mehrsa thinks that in the year 2020, there shouldn't be a need for Black-owned banks. But, she says, generations of exploitation and exclusion have left us with a financial system that is primarily geared towards serving white communities. Despite legislative efforts over the years, she says the system still routinely underserves the Black community.

VANEK SMITH: According to the FDIC, the Federal Deposit Insurance Corporation, nearly half of Black Americans are unbanked or under-banked, meaning they don't have access to the financial services they need. Often, that means they have to rely on lenders like check cashing services or payday lenders, which can charge extremely high interest rates and fees. Sidney King, the CEO of Commonwealth Bank, says many of his customers simply have a deep distrust of banks.

KING: In the African American community, they don't see the big banks as being for them because, you know, you go back over the years, grandparents didn't have banking relationships, parents in many instances didn't have banking relationships. So a lot of people don't feel comfortable going to those institutions.

RAFIEYAN: He says that his bank, Like most Black-owned banks, is designated as a community development financial institution focused on serving customers that would otherwise be locked out of the banking system. That allows them to take a more personalized approach.

KING: We have conversations with our customers. We get to know them and get to know their situations. I remember a lady who was a nurse, had been in nursing for 22 years, perfect Credit until her husband got caught up on drugs. Had to file bankruptcy, but she needed a car. So even though she had filed bankruptcy, I made her a car loan. And she never missed a payment, you know. But a lot of other institutions, when that person goes in, the bank reps say decline. You know, there's no questions asked. To most banks, you're just a number. Here, you know, our children go to school together. We attend the same churches. We know our customers.

RAFIEYAN: That level of personalized attention is part of what makes a bank like Commonwealth so special, but it's also very time and labor-intensive. And that makes it harder for Sidney's bank to compete with big banks that might be using an algorithm to decide who gets a car loan.

VANEK SMITH: But Sidney says that granular knowledge of Black communities allows Black-owned banks to both manage their risk effectively and provide banking services to people who really need them. That can mean extending loans to Black-owned businesses, funding renewal projects in blighted neighborhoods and, of course, helping to promote Black homeownership. At a typical Black-owned bank, 67% of mortgages are given to Black households. That's compared with less than 1% at the average bank.

RAFIEYAN: And while Black-owned banks have seen their numbers dwindle in recent years, the unrest sparked by the killing of George Floyd may have interrupted that trend.

KING: We are seeing more and more interest in coming in and opening accounts. We're probably seeing, if not twice, maybe three times the number of new account openings in the last few weeks.

RAFIEYAN: Sidney says Commonwealth still only holds about 1% of Black bank deposits in Mobile. He'd like to get that number up to 5%. That would help him, of course. It would make Commonwealth a quarter-of-a-billion-dollar bank. But it would also put the bank on better footing to provide much-needed services to people who are still struggling to participate in the financial system more than 50 years after Congress passed laws that were supposed to end discrimination in banking.


RAFIEYAN: This episode of THE INDICATOR was produced by Camille Petersen and fact-checked by Brittany Cronin. Our editor is Paddy Hirsch. And THE INDICATOR is a production of NPR.

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