FDIC launches capital investment fund for Black-owned bank, CDFIs with initial $120 million pledge

FDIC launches capital investment fund for Black-owned bank, CDFIs with initial $120 million pledge

BCN Staff – Sept. 19, 2021 — The Federal Deposit Insurance Corporation (FDIC) on Sept. 16 announced the launch of the new $120 million Mission-Driven Bank Fund, a capital investment vehicle to support insured Minority Depository Institutions (MDIs) and Community Development Financial Institutions (CDFIs).

As anchor investors, Microsoft and Truist Financial Corporation will lead the investment Fund. In addition, Discovery, Inc. will join as a founding investor in the Fund bringing the combined initial commitment to $120 million, with additional investments expected.

“Microsoft and Truist have answered the call to become anchor investors and to assist the FDIC in developing this Fund for the benefit of mission-driven banks and, most importantly, the people and places these institutions serve,” said FDIC Chairman Jelena McWilliams. “It is our hope that with the commitment of these industry leaders, more private equity investors will join the growing ranks of those committed to building opportunity and prosperity where this support is needed the most.”

Microsoft officials said supporting mission-driven banks aligns perfectly with the Silicon Valley software giant’s commitments to address racial injustice and inequity. “The Mission-Driven Bank Fund will enable banks to more effectively manage risk, leverage innovative technology solutions, and directly increase funds to diverse and underrepresented communities,” said Anita Mehra, corporate vice president for  Global Treasury and Financial Services at Microsoft. “We look forward to the seeing the continued opportunities this will help provide for mission-driven banks and the communities they serve.”

“The partnership with Microsoft and the FDIC, as an anchor investor in the Mission-Driven Bank Fund, is a direct investment in advancing our purpose to inspire and build better lives and communities,” added Truist CEO William Rogers Jr. “MDIs and CDFIs play crucial roles serving the needs of minority and rural neighborhoods, and Truist has an established history of partnering with these organizations. We’re extending this commitment through an innovative approach to capital investments and we believe this will significantly enhance these institutions’ ability to provide positive outcomes for our communities.”

Discovery Inc. President and CEO David Zaslav said the media giant’s investment in the new funds   advances company’s internal RISE program, a global initiative launched in June 2019 to global initiative that focuses on reducing inequality and supporting empowerment around the world.

“Our global commitment to reducing inequality and supporting empowerment, by providing minority and rural communities with much needed access to capital and resources,” said Zaslav. “We are proud to be an initial investor in this fund and hope that by joining forces with other private funders, we can drive real opportunity and make a difference in people’s lives and in the communities we serve.”

The development of the FDIC-backed fund amid the ongoing COVID-19 pandemic comes at a time when Black-owned banks are struggling to survive. In early August, the Federal Reserve Bank of San Francisco released a report showed there were only 20 Black-owned MDIs that have survived since COVID-19 was declared a global pandemic in March 2020.

“The COVID-19 pandemic disproportionately affected the health and financial well-being of communities of color. Over the past year, minority banks that specialize in providing financial services to underserved communities and minority borrowers have also performed significantly worse than other banks of similar size,” said the Aug. 2 report writing by Fed economic researchers Sophia Friesenhahn and Simon Kwan. “Minority banks projected higher loan losses and had lower profits than nonminority banks. To the extent that underperforming minority banks may be more reluctant to expand lending—whether to avoid risk or minimize regulatory scrutiny—it could further exacerbate the unevenness of the recovery.”

According to another widely cited 2019 report commissioned by FDIC Chair Jelena McWilliams, the number of MDIs in the U.S. declined by 9.1% between 2001 and 2018. What sticks out about this report was that the number of Asian American and Hispanic American MDIs increased but African American MDIs were decimated by the Great Recession in 2008 and the financial and housing crisis fallout in the decade after.

As the MDI sector has changed, so has its composition in terms of minority status. According to the FDIC report, African American MDIs represented 15% of all MDIs at year-end 2018, compared with nearly 30% of all MDIs in 2001. During that same period, the asset value of Black-owned MDIs has also taken a big hit. In 2018, African American banks had less than 2% of total assets for all MDIs, compared with 6% in 2001. The combined asset value of all Black-owned banks in the U.S. is only a tidy $4.5 billion.

By comparison, the $10 billion asset mark is the key financial touchstone established by the Dodd-Frank Wall Street Reform and Consumer Protection Act as the regulatory baseline between mid-sized-community banks and smaller regional banking groups such as Bank OZK, Simmons First, Home BancShares, and Arvest Bank in Arkansas.

Today, among the 5,000 federally insured financial institutions across the U.S. at the end of 2020, there were 142 MDIs. Those included 72 Asian American MDIs, 32 Hispanic American MDIs, 20 African American MDIs, 17 Native American MDIs, and 1 multiracial MDI. The median total assets of MDIs in 2020 was $361 million, which was comparable to the median size of non-MDI community banks.

In addition, MDI balance sheets also generally resemble those of community banks that accept core deposits to make loans. A typical MDI loan portfolio includes mostly residential mortgages and commercial real estate lending, while some larger MDIs have more diversified loan portfolios. MDIs are geographically linked to the communities they seek to serve and are concentrated in certain metropolitan areas, including San Francisco, New York, Atlanta, and Dallas.

During the pandemic, nearly all U.S banks and financial institutions expanded their lending in response to the higher loan demand that was driven in part by the federal Paycheck Protection Program (PPP) overseen by the U.S. Small Business Administration. The Federal Reserve report said the median MDI provided significantly more credit in 2020 to their minority borrowers than the median non-MDI.

“This was consistent with the disparity in credit needs among the more severely affected minority populations. With the end of the PPP in May 2021, how well MDIs can meet the future credit needs of their borrowers is uncertain,” wrote Friesenhahn and Kwan. “To the extent that underperforming minority banks may be more reluctant to expand lending due to risk aversion or concerns about regulatory scrutiny, it could further exacerbate the unevenness of the recovery.”

In designing the framework of the new investment fund for Black-owned banks, the FDIC said it engaged approximately 70 chief executives of MDIs and CDFIs and their trade groups as well as potential investors, investment consultants, and philanthropic organizations. The FDIC said it will retain an advisory role to support the fund’s mission focus but will not contribute capital or be involved in the management or investment decisions associated with the venture.

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