The number of minority-designated banks in the U.S. has dropped in the last decade, and with the pending sale of Miami-based Continental National Bank, another will fall off the list. The loss of minority-designated institutions can harm consumers, sometimes leaving them without access to traditional banking services, according to experts.
The Federal Deposit Insurance Corp. defines minority banks as those with either a concentration of ownership among members of a certain minority group, or a concentration of board membership among that minority group by an institution that primarily serves that group. Benefits of participating in the FDIC's minority depository program, which is voluntary, include access to regional coordinators knowledgeable about minority bank issues and technical assistance.
Minority banks "are more likely to focus on communities of diverse ethnic and immigrant backgrounds," and often serve clients with lower incomes and more credit constraints, according to a study by Maude Toussaint-Comeau and Robin Newberger at the Federal Reserve Bank of Chicago.
"Even within similar markets, MDIs may be serving or lending to different customers," Toussaint-Comeau, a senior business economist at the Federal Reserve Bank of Chicago, wrote in an email.
The FDIC has listed Continental National as an Hispanic-designated minority bank since 2001, as far back as the data goes on the regulator's website. The number of Hispanic-designated banks dropped to 35 at the end of 2018, down from 50 at the end of 2009. The overall number of FDIC minority-designated banks dropped to 149 in 2018 from 207 in 2009.
First American Bank, Continental National's acquirer, is not minority designated, and Continental will lose its status when the deal closes. Elk Grove Village, Ill.-based First American moved into Florida with its acquisition of Coral Gables, Fla.-based Bank of Coral Gables in 2014. Bank of Coral Gables only had one branch, and First American CEO Thomas Wells said that the bank's goal with its purchase of Continental is to gain scale and contacts in the community.
"We like them and [what] they've done as a bank," said Wells in an interview, but the minority designation "didn't drive us one way or the other."
When banks leave an area or change their workforce, it can create problems for communities that lack access to the traditional banking system.
"Minority populations are still disproportionately more likely to be unbanked or underbanked," Toussaint-Comeau said. Underbanked clients maintain bank accounts with traditional financial institutions, but also use financial products outside the mainstream. Unbanked people do not have a bank account at all. A 2011 FDIC study found that minority households were more likely to be unbanked. The study found that 10 million unbanked households did not have accounts with financial mainstream institutions.
"The research suggests that bank branch presence does matter, especially in low-income and minority communities," wrote Toussaint-Comeau. "Some research has found that places with black-owned banks and Hispanic banks have reduced racial disparities in several economic welfare indicators."
When banks leave, alternative financial services such as payday lenders and other unregulated products tend to move in, said Marisabel Torres, a senior policy analyst with UnidosUS who specializes in Latino access to financial products and services. "They can be very, very financially problematic for economically vulnerable consumers," she said.
Torres said people outside the financial mainstream notice when institutions leave their neighborhoods. "The members of the communities are impacted by these types of acquisitions ... they are aware of it, and they do see the connections to a larger structural issue," she said.
Torres said non-minority institutions should see working with minority institutions as an opportunity. This type of partnership can boost Community Reinvestment Act scores, one measure of how well a bank is meeting the credit needs of its local community. It can also improve a bank's reputation. "Word of mouth [is] still a very strong way to get a reputation," Torres said.
Some credit unions may be stepping up to fill in the financial gaps, Torres noted. The National Credit Union Administration listed 529 minority-designated credit unions on its website at the end of 2018. That number is down from 805 in June 2013.
The loss of a minority designated bank can have lasting consequences. "The special nature of relationship lending, which may be lost when a community-based bank closes or fails, in some instances may not be easily replaced," the authors of the Fed study wrote, "even if the newcomer appears similar in terms of minority designation or mission statement."