Do minority banks perform better or worse than non-minority banks?

ABSTRACT

We investigate whether Minority Owned/Controlled

Banks (MDIs) perform better or worse than Non-Minority Banks (NMDIs) in terms of lower profit rates and higher risk. MDIs and NMDIs are compared using a propensity score matching (PSM) methodology. We also compare the performance when their headquarters are in the same census tract. In contrast to previous and earlier studies, the empirical results indicate that MDIs exhibit no signs of under- or over-performance vis-à-vis NMDIs. Moreover, we find no statistically significant difference between the four sub-categories of MDIs (Black, Asian, Hispanic, and Native American) and NMDIs regarding either profitability or riskiness. Robustness checks using zip code and city-level data effectively confirm these results.

KEYWORDS:

• Minority banks
• bank performance
• bank profitability
• bank risk

JEL CLASSIFICATION:

• G20
• G21
• G28
• R10

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Following Welton et al. (2015), ‘minorities’ has referred to groups of persons who by and large are members of historically excluded groups.

² The corresponding share of all bank assets is 1.3%, as of the fourth quarter of 2018.

³ See https://www.federalreserve.gov/publications/files/promoting-minority-depository-institutions-2021.pdf. accessed April 26, 2022. In this regard, Ricks (2018, 14) states that ‘The Office of Minority Banks and Section 367 [of the Dodd Frank Act] have been in place for over ten years, the effectiveness of these measures appears at best to be minimal’.

⁴ In March 1969, the Minority Bank Deposit Program (MDBP) was created in response to an Executive Order by President Nixon, which established a national program supporting minority business enterprises. Section 308 of FIRREA includes provisions supporting the intent of the MDBP. See https://fiscal.treasury.gov/mbdp/about.html, accessed April 26, 2022.

⁵ For example, in one of the earliest empirical studies, Carter, Simkins and Simpson (2003) examine the relationship between board diversity and firm value for Fortune 1,000 firms. They find a significant positive relationship between the fraction of women or minorities on boards and firm values. In a related paper, Erhardt, Werbel, and Shrader (2003) find a positive relationship between the percentage of women and minorities on boards of directors and financial indicators of firm performance for 127 large U.S. companies.

⁶ Interestingly, a study by Fairchild et al. (2020) finds that MDIs are not systematically less efficient than their NMDI counterparts.

⁷ In a related paper, Henderson (1999) argues that the poor performance of Black MDIs may be attributable to inadequate assessment of risk as measured by adjustments to the provision for loan losses.

⁸ Black, Collins, and Cyree (1997), in an interesting paper, find that only black-owned banks utilize applicant race in the mortgage credit decision. In addition, they find that black-owned banks are more likely than white-owned banks to reject similarly situated black applicants, but do not attribute this result to discrimination against black borrowers. They suggest that their results indicate that the cultural affinity hypothesis may run from white-owned banks to white applicants and not from black-owned banks to black applicants.

⁹ According to the Census Bureau website, ‘ZIP Code Tabulation Areas (ZCTAs) are generalized areal representations of United States Postal Service (USPS) ZIP Code service areas. The USPS ZIP Codes identify the individual post office or metropolitan area delivery station associated with mailing addresses. USPS ZIP Codes are not areal features but a collection of mail delivery routes’. Based on this definition, we decided that a geographic unit with areal features is more appropriate for this study. See https://www.census.gov/programs-surveys/geography/guidance/geo-areas/zctas.html, accessed May 19, 2022.

¹⁰ In a study of bank efficiency, Iqbal, Ramaswamy, and Akhigbe (1999) find that MDIs are less efficient than comparable NMDIs in maximizing outputs from a given set of inputs. They further argue that this finding is yet another explanation for poor earnings performance of MDIs.

¹¹ See FDIC Definition of Minority Depository Institution, https://www.fdic.gov/regulations/resources/minority/mdi-definition.html, accessed May 19, 2022.

¹² In October 1977, President Carter signed a memorandum for all Heads of Departments and agencies promoting the use of minority-owned enterprises by placing deposits in MDIs. See https://fiscal.treasury.gov/mbdp/about.html, accessed April 29, 2022.

¹³ It might be noted that the National Bankers Association, which was incorporated in 1972, is a national trade association for MDIs. According to Price (1990), ‘[I]t provides a forum for sharing information and resources and also actively solicits deposits from government agencies and major corporations for its members’..

¹⁴ However, Price (1994) finds that government deposits are expensive, and that deposits received through the MBDP may have the effect of increasing risk in the asset portfolio. Price (1995, 300), in a subsequent paper, argues that ‘ … MBDP is a cost ineffective way to simulate BCB [Black Commercial Bank] entry, and should therefore be abandoned’. More recently, Kashian, McGregory, and Drago (2017) find that government deposits did not adversely effect efficiency among MDIs, but may have improved survival rates for them after the financial crisis.

¹⁵ Federal government deposits as a percentage of total deposits for MDIs (NMDIs) was 0.11 (0.03), while the corresponding percentage of state and local government deposits for MDIs (NMDIs) was 8.49 (4.49).

¹⁶ Minority Bank Deposit Program (MBDP), https://www.fiscal.treasury.gov/mbdp/getting-started.html, accessed July 19, 2022.

¹⁷ See Kashian and Drago (2017), who study bank failures from 2009 to 2014. They find that failures among MDIs, compared to a similar sample of community banks, were disproportionately located among Asian MDIs and particularly Black MDIs. This is consistent with Figure 1, which shows a decline in these two categories of MDIs over the period 2009 to 2014.

¹⁸ See https://www7.fdic.gov/sdi/download_large_list_outside.asp, accessed February 3, 2022.

¹⁹ See https://data.census.gov/cedsci/, accessed February 3, 2022.

²⁰ Census tracts are small, relatively permanent geographic entities within counties (or the statistical equivalents of counties) delineated by a committee of local data users. Generally, census tracts have between 2,500 and 8,000 residents and boundaries that follow visible features. See https://www2.census.gov/geo/pdfs/reference/GARM/Ch10GARM.pdf, accessed February 18, 2022.

²¹ See https://www.ffiec.gov/censusapp.htm, accessed May 11, 2022.

²² The detailed information of the selected information on banks and bank Offices, and MDIs and MDI offices in census tracts nationwide is available upon request.

²³ A low-income census tract is one for which median family income is >0% and <50% of the MSA/MD median family income, while a moderate-income census tract is one for which median family income is > = 50% and <80% of the MSA/MD median family income. See https://www.ffiec.gov/geocode/help3.aspx, accessed May 10, 2022.

²⁴ Because actual MDI failures are infrequent, we rely on these two performance measures. For our sample period, 2001 to 2017, only 2 MDIs failed.

²⁵ In a private conversation, Harold Black, Professor Emeritus of Finance at the University of Tennessee, suggests that better personal networks among non-minorities interested in entering banking may have played a role in the establishment of so many NMDIs.

²⁶ In this regard, Barth and Betru (2019) suggest allowing opportunity zone investments in MDIs.