Investing in a fairer post-pandemic banking system
Here’s what the Treasury’s new investment in 186 Community Development and Minority Financial Institutions will mean for more than 160 municipalities across the country.
In the Morrisania section of the Bronx, New Covenant Dominion Federal Credit Union has seen steady growth in its loan portfolio since the start of the pandemic.
It’s tiny, even by credit union standards, with just $1.4 million in assets. But as of September 2021, in its latest report to federal regulators, the credit union had 213 loans on its books, totaling more than $1 million, nearly double the number of loans (129) and value (535). $000) in March 2020.
Most of these loans are unsecured lines of credit – for members who have at least two years of account history with no checks or NSF payments, New Covenant Dominion offers an unsecured line of credit of up to $5,000 . “Unsecured” means that no collateral is required. The average interest rate on these lines of credit is 11%, just a few points below the New York Statewide interest rate cap of 16%. These are the types of loans that often serve as an alternative to payday loans, or can be useful in an emergency, such as the sudden loss of a job during a global pandemic.
Like its surrounding neighborhood, New Covenant Dominion members are predominantly black, Hispanic, and low-income. The median income of Morissania is $24,010about a third of the median income for the whole country. In 2017, New Covenant Dominion was among the first credit unions to go through a newly streamlined process of U.S. Treasury certification as a Community Development Financial Institution, or CDFI – meaning that at least 60% of its loans and other services target low to moderate levels. income communities. The certification opened the doors to federal grants for CDFIs, which helped position the credit union for the rapid growth it has experienced in recent years.
But there is always more to do. There are always more households of color or of modest means who struggle to obtain the same ease of access to credit as wealthier households. For New Covenant Dominion to serve more of them, especially those facing the systemic racism of lower credit ratingsthe main constraint is not deposits as most people might expect.
The main growth constraint for banks and credit unions is what they call “equity”. It has a very specific meaning for banks and credit unions, and it can come from a few places. For banks, equity begins with the money that its founders or shareholders have invested as owners of the institution. For credit unions, this pool can be a donation from a sponsoring organization such as a church, another nonprofit, or the company whose employees form a credit union. If banks or credit unions have a profitable year, they can contribute some of the surplus to their equity base. Banking regulators require institutions to maintain a minimum ratio of capital to total assets – banks need $1 of capital for every $12 of assets, credit unions $1 of capital for every $16 in assets.
Equity is the most difficult type of money for banks and credit unions to raise, especially if they focus on communities like Morissania, and especially if they are credit unions that are not structured to generate massive profits for shareholders. New Covenant Dominion currently has $186,000 in equity – but it was recently announced as one of 186 banks and credit unions across the country to receive equity investments from New Covenant’s new capital investment program. US Treasury emergency. New Covenant Dominion is the smallest of the announced beneficiaries, and the Treasury investment could more than double the equity of the credit union.
“For the CDFIs and minority depository institutions that have long been involved in this work, [Treasury’s Emergency Capital Investment Program] gave us the opportunity to think more boldly about our growth and impact,” says Cathi Kim, who helps credit unions raise equity through the work of Inclusiv, a national network of credit unions. which focuses on community development.
The ECIP is part of a recent increase in equity capital sources for banks and credit unions, with a focus on historically disinvested communities. These sources of capital have emerged largely in response to the continued decline in the number of black-owned financial institutions, which today number less than 20 from around 40 a decade ago. There is the Black Bank Fundthe Black Vision Fundor the MDI Guardian Fund — which is affiliated with the National Bankers Association, a trade group for black banks. There is also the FDIC’s Mission-Driven Fund, which also plans to invest in banks. These funds, collectively, have so far promised to provide at least a few hundred million dollars in equity to banks or credit unions.
Like these other funds, all ECIP investments must be repaid, but ECIP investments are also structured more favorably than most private investors can offer – ECIP recipients will repay their investments in 15 or 30 years, at rates interest rates between 2% and 0.5%, with lower interest rates based on each institution’s actual performance later in terms of lending to low- and middle-income households, high-poverty areas, or rural areas.
Representing $8.7 billion in equity investments, ECIP is also larger than all of these others combined so far, by at least an order of magnitude.
As required by the program, all of the 186 announced ECIP program beneficiaries are CDFIs, minority depository institutions, or both. They include 101 banks and 85 credit unions, located in 160 municipalities across the country, from the largest to the smallest.
The biggest beneficiary of ECIP is Suncoast Credit Union, based in Tampa, Fla., with more than $14 billion in assets. But all of the smaller recipients are also credit unions – of 68 ECIP recipients with less than $100 million in assets, 57 are credit unions and all 12 ECIP recipients with less than $25 million of assets are credit unions.
Not all institutions that have applied for the ECIP have been announced as recipients – so far. Under the Consolidated Appropriations Act of 2021, which established ECIP, the program has the authority to invest up to $9 billion, which means there is still $300 million remaining that the program could invest later. Last year, 204 institutions applied to ECIP, seeking a total of $12.8 billion in equity.
The Treasury Department said it assessed applications based on each institution’s financial health, track record of reaching target communities, and plan for growth with new equity from ECIP.
At Inclusiv, Kim has helped a host of credit unions with successful ECIP applications. She says their growth plans have focused on a range of strategies. Some want to work through new partnerships such as with faith groups or grassroots organizations, others open new branches located in Hispanic communities or other communities they have not yet reached, and others focus on using new technology to reach new members.
Due to the way banking and credit union regulations currently operate, raising equity can also allow for more inclusive lending criteria.
Kim notes that some credit unions she has supported plan to reach new members or increase lending by creating new loan products for borrowers with lower credit scores, little or no collateral, down payments. smaller, fewer years in business, or no social security number. Some of these credit unions, according to Kim, already have pilot programs that do some of this work, and now they want to expand those programs.
The increase in equity makes possible more inclusive lending criteria due to how banks and credit unions have been regulated since the late 1980s.
Rather than outright telling institutions not to use more inclusive lending criteria, regulators today want to make sure they store enough capital to protect against perceived risk – not necessarily because the bank will lose. money. If a bank or credit union is about to take on what regulators perceive as new or additional risk, regulators want to make sure it’s far enough above the minimum capital ratio just in case. she would lose money on some bad debts.
These losses may indeed never occur, but regulators can and do ask institutions to either increase their capital adequacy ratio or adhere to stricter lending criteria, which regulators perceive as less risky. Because of the difficulty for smaller banks or credit unions to raise equity, they often end up going the other way. For these 186 ECIP beneficiaries in 160 localities, they have more flexibility than ever to do things differently.
“When you’re looking to expand the credit box, you need to be able to increase the reserves, the dedicated capital that you have,” Kim says. “When you try new things, regulators want to see that higher level of reserves before they start designing those products.”
Oscar is Next City’s senior economics correspondent. He previously served as Next City Editor-in-Chief from 2018-2019 and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.