Minority Owned Community Banks: 1995-2004

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ABSTRACT

This paper documents the changes in minority ownership of banks over the past decade, 1995-2004. The number (26 to 62) and percentage (.93% to 1.78%) of minority owned banks has increased from 1995 to 2004. The Asian and Hispanic groups experienced the most growth while the African-American group experienced the least. We segment our sample of community banks over the past decade into minority owned banks (MOB) and non-minority owned banks (NMOB). We find significant differences in the bank characteristics MOBs versus NMOBs. We also examine each minority group separately and determine that there are unique characteristics exhibited by each group.

INTRODUCTION

A financial institution is considered to be minority owned if 51% or more of the voting stock is owned by one or more minorities including African-Americans, Hispanic-Americans, Asian-Americans, Native-Americans, and women. One exception to this requirement occurs if the bank's board of directors is mainly minority run or if the bank is serving a community that is predominately made up of minorities. Since a large number of minority owned banks are located in low-income areas, they are often viewed as being the providers of economic stimulation to surrounding underdeveloped communities. The minority owned bank's willingness to make loans in small amounts, connect with the community, and provide other services targeted to minority or low-income groups gives them access to a banking niche that would otherwise not be served. Some critics believe that lending money to individuals and/or businesses in these poor communities is too risky since most minority owned banks do not have access to large amounts of assets (e.g. Brimmer (1971)). Yet, advocates have lobbied for the creation of government sponsored programs that assist minority owned banks through funding.

The first government program created to aid minority-owned banks was the Minority-Bank Deposit Program (MBDP). It was designed by the Nixon administration and put into effect in October of 1970. The MBDP gives minority owned banks preferences to deposits that are made with funds from the federal government. It also encourages corporations to make deposits into minority owned financial institutions. This program was followed up with the Community Reinvestment Act which was passed by Congress in 1977. It was created in an effort to encourage banks to contribute to the communities that they served, especially low-income areas. The most recent act created to assist the minority banking community is the Community Development Banking Act. It was signed into law in 1994 by President Clinton with the intent of encouraging the creation of a group of community development banks. Beyond the reach of these programs, the FDIC has the ability to help minority owned banks survive even if they are being outperformed by their competitors if the MOB is viewed as being essential to the community that it serves.

It has been debated whether or not these programs have met their goals and contributed to the communities in which they operate. According to the majority of studies, minority owned banks are consistently less efficient and profitable than non-minority owned banks. Some studies attribute the lower levels of efficiency and profitability of minority owned banks to the volatile nature of the large amounts of government deposits that they hold. Other studies have attributed these discrepancies to anything from location in low-income communities to less-qualified key employees. The varying conclusions that have been drawn by previous studies leave room for further exploration of this topic. This paper will not directly address these conflicting views but will rather document the evolution of minority owned community banks over the past decade from 1995 to 2004. We limit our sample to U.S. commercial banks with total assets between $100 million and $1 billion because this is where the majority of minority owned banks exist. …