As the US financial system works to address the financial challenges of COVID-19, it is very clear that bigger is not better. The New York Times on 23 June 2020 featured an article on Cross River Bank. What makes this bank even more interesting is its business model that partners with a variety of fin-tech firms to serve customers. The article notes that Cross River has had challenges over the years with some of its activities, but its model is one which should be considered as an alternative. Cross River was able to provide more than 106,000 small businesses with access to the Paycheck Protection Program for a total of $4.7 billion. As the lending should ultimately be repaid through the government program, the primary risk is likely to be operational to ensure that the loans were properly made and that they should be forgiven under the program.
Banking and racism – ideas for action
Two recent articles in the New York Times provide substantial food for thought for bankers. It is increasingly recognised that racism exhibits itself in many ways and often not directly. If racism is to be addressed comprehensively, it is necessary to look at the many ways in which it becomes embedded in our economic, political and social systems. The financial system is one where attention needs to be paid.
In an editorial comment on 26 June 2020 in the New York Times, Angela Glover Blackwell and Michael McAfee argue that “Banks Should Face History and Pay Reparations.” Whilst one does not need to accept fully their proposed solution, they provide a very substantial historical record of how banks have been complicit in reducing wealth accumulation for blacks. This record includes not only finance for the development of slavery but ongoing discrimination continuing through the present that has been a significant impediment for accumulation of wealth by the black community. The end of slavery in the US in the 1860s did not end the impact of racially discriminatory actions.
On 30 June 2020 an article in the New York Times provides the story of Wole Coaxum. He left a Managing Director role at JP Morgan Chase to set up Mobility Capital Finance. This entity focuses on getting financial products and services to the unbanked and underbanked – often individuals and entities of colour. Similarly Maria Blow built and sold a business focusing on alternatives to payday lending. She is now working at MasterCard’s Center for Inclusive Growth. These are concrete examples of how banks can, and should, address racial discrimination.
These effort are very challenging but the financial system needs to find ways to support racial justice. Doing nothing is not an acceptable option.
More canaries in the coal mine
An in-depth article on 23 June 2020 by Robert Armstrong highlights the great risk in the US economy from too much personal leverage. The impact of COVID-19 on the ability of people to survive as their sources of livelihood are substantially interrupted is clearly detailed in this article. Unlike the virus itself, the impact is not likely to be immediately visible but over time the impact on asset quality for financial institutions that have provided the loans to these individuals will be felt.
A few days later, Rana Foroohar in the Financial Times of 28 June 2020 focused on the impact of COVID-19 on small businesses. Her sobering analysis correctly notes that the real damage from COVID-19 will not be felt by the larger corporations and banks initially but rather by the numerous small entrepreneurs that have always lived a more precarious existence. Although individually these entities are not critical, collectively they have significant influence on the real economy. Their challenges will work through the economic system impacting larger corporations as well as banks of all sizes. As with the entrepreneurs, smaller community based banks are likely to be impacted first but that impact will work its way through the banking system.
These challenges will be a major risk for the economic recovery from COVID-19 and should not be underestimated. The question for many banks should be how can they support these critical entities whilst also maintaining credit standards. A truly difficult dilemma facing the banking system and the economy.
Raising Core Equity Capital for Community Development Banks — A New Capital Model
I would like to share my blog today with good friend and colleagues. Over the years I have had the pleasure to work with George P. Surgeon, Laurie J. Spengler, Darrin L. Williams, Radek Halamka, and Nathan Pittman. They are publishing today an interesting paper on raising equity for community development banks in the US. In their words:
Why have Community Development Financial Institutions (CDFIs) captured so many headlines these past few weeks? Because they are on the front-line responding to the economic repercussions of COVID-19 in disinvested communities across the country – communities that are out of reach by the big banks and out of sight to many. CDFIs were there providing responsible finance to these very communities before the global pandemic hit hard, and they will be there after the pandemic recedes. CDFIs demonstrate – then and now – the vital role of our local financial infrastructure to the health, stability and long-term viability of local communities. Perhaps their role has taken on even more relevance in the wake of COVID-19.
But to continue to play this vital role, CDFIs need greater levels of core equity capital – not only attractively priced debt – to leverage their balance sheets and make loans to small businesses, provide mortgages to families and meet the financing needs of the communities in which they live and operate.
Southern Bancorp commissioned this paper to trace the evolution and successful implementation of a new capital model Southern developed for community development banks, a subset of the CDFI universe. This new capital model allowed Southern to succeed in the largest capital campaign in its history. The new capital model has laid the groundwork for Southern and other community development banks to access the capital markets and raise larger amounts of core equity capital in the future.
As we face the urgent task of rebuilding local communities emerging from the Covid-19 crisis, this new model for equity investment in community development banks could not have come at a better time. We hope that sharing Southern’s experience will accelerate the capitalization of community banks and all CDFIs. The time to support these community first responders is now!