A Thought: African-American banks and moving your money
Anyone who has been reading this blog for awhile knows that my biggest problem with Obama administration and the Federal Reserve was the Wall Street bailout which was pretty much limited to helping the major money center banks and firms like AIG. Many of these institutions were at the center of the financial crisis we encountered. The unpopular policies pursued by our government resulted in the taxpayer being put on the hook for poor management decisions made by many of these institutions. Moreover, the policies pursued by the Federal Reserve have allowed certain institutions to become extremely profitable which ultimately reinforces the “too big to fail” policy and the related moral hazard policy it has pursued since the Greenspan era. This is akin to allowing these institutions to effectively hold a sword of Damocles over the financial economy as they’ll be at the government trough again without the discipline of market forces and sensible regulation.
This has spawned a movement as a sort of protest against this and the idea is for people to move their money out of these major money center banks as a way to counter their power. Essentially, the idea is smaller depositors moving their deposits en masse to smaller community based banks thereby nullifying the policies while at the same time increasing the deposit base of community based institutions that are more inclined to lend. I think that’s a good idea and it’s something that’s fairly simple to do.
As I was reading about this movement, I thought of African-American owned banks and how a similar movement might not only help these institutions, but the African-American community at large. After doing some research, I found that a popular African-American talk show host had made a similar call late last year as a way of economically empowering the African-American community. Here’s a list of African-American owned banks that was compiled for this purpose. I went through this list to check some of the banks’ ratings at www.bankrate.com, which assigns a rating from one to five stars, with five being the highest rating, based on asset quality, solvency and profitability measures. Of the eight banks I checked, one had four stars (Liberty Bank & Trust of New Orleans), three had three stars and the rest were rated below three stars. The banks with the low ratings generally had issues with adequate capital, which is tied directly to profitability and the quality of loans on the books.
During the past year, a group of African-Americans tried to raise $ 50 million to create a black owned holding company that would invest in black banks in a bid to shore up their capital, but their efforts appear to have been strictly limited to attempting to get a piece of the treasury’s TARP program rather than to raise the money the traditional way from the public securities markets. Of course, their claim was that these markets aren’t receptive to black banks, which is probably true given that only one black bank’s stock is publicly traded. That means that most of these institutions don’t have access to vast pools of capital.
Given that most black banks can’t access public markets for capital, it just seems to me that they could be greatly helped if their depositor base were expanded. We don’t need government assistance to do that, all people need to do is make a decision where they will house their money. Of course, housing your money at a black bank doesn’t do much to spur economic development in the community unless there’s a commitment to lend money. Lending money for a bank has to be a profitable proposition, which means that the conditions that chase investment capital away from the black community now (i.e. high crime, lack of skilled workers and etc.) have to also be resolved. Those conditions make lending and opening a business in these areas a risky proposition and this is the greatest impediment to economic development. None of this will be solved overnight, but I suppose moving one’s money, where practical, is a start towards a building effort.
What is really needed to make such a move effective is a strategic plan for the development of the African-American community that is based wholly on what we can do for ourselves absent government assistance and the strings that come along with it. There are plenty of plans around things like increased diversity which, while helping select individuals, actually does very little to address the community’s ills. There are plenty of plans where continued petitions are made to the government to address our problems, but there is nothing that I’m aware of that would represent a plan based wholly on decisions we can make or things we can do to address the problems ourselves. Such a plan is sorely needed, not to mention the execution thereon. Absent that, we’re all reduced to calling for this or that absent the knowledge of why or where the initiative leads strategically.